The CAPM states that when stock market prices are at equilibrium,the rate of returns that investors can expect to earnona security is equal to the risk-free rate plus the risk premium.In other words,investors areexpected to be compensated for the additionalrisk taken and thetime value of money. Therisk-free rateisthe time value of money which investors would receive without bearing any additional risk. The other components of the CAPM formula account for the risk premium that investors expect to receive for taking additional risk.

What is the required rate of returns on MSFT stock if its beta is 1.24. Currently, 3-month T-bill rate is 4% and expected returns on S&P 500 index is 16%.