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To calculate the expected rate of return using the Capital Asset Pricing Model (CAPM), the formula is:

\[
E(R_i) = R_f + \beta_i \times (E(R_m) - R_f)
\]

Where:
- \(E(R_i)\) = Expected return on the investment
- \(R_f\) = Risk-free rate of return (1.6%)
- \(\beta_i\) = Beta of the investment (1.9 for PayPal)
- \(E(R_m)\) = Expected return of the market (12%)

### Plugging in the values:

\[
E(R_i) = 1.6\% + 1.9 \times (12\% - 1.6\%)
\]

\[
E(R_i) = 1.6\% + 1.9 \times 10.4\%
\]

\[
E(R_i) = 1.6\% + 19.76\%
\]

\[
E(R_i) = 21.36\%
\]

Thus, the expected rate of return for PayPal is **21.36%**.

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Do you want more details on this, or have any other questions?

Here are some related questions to explore:
1. What does a high beta mean in terms of investment risk?
2. How does CAPM compare to other methods of calculating expected returns?
3. What role does operating income play in investment decision-making?
4. How do changes in the risk-free rate impact expected return?
5. What is the significance of comparing investments using CAPM?

**Tip**: A higher beta indicates greater volatility and risk compared to the market average, which impacts the expected return.

BlackRock is planning to make an equity investment in PayPal Inc. They need the expected rate return on this investment to compare it to an alternative investment. Use the CAPM to find it. The expected return of the market is 12% and the return on a risk-free asset equals 1.6%. PayPal's Beta equals 1.9.

Calculate the expected return on BlackRock's investment in PayPal using CAPM. With an expected market return of 12%, risk-free return of 1.6%, and PayPal's beta of 1.9, the expected return is 21.36%.

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