Questions:
What is the expected return of a stock according to the CAPM model?

Our company recently completed divesting some of the spare assets 2 months ago, which has caused in increase in the volatility of our returns from 30% to 40%; however, the correlation of our stock's returns with the market has risen from 0.5 to 0.6. The risk free rate in the country has remained unchanged at 4% in the last 6 months. The market return before the divesting occurred was 18%; however, this month's revised estimates show an increase of 1.75%. The standard deviation in the market has decreased to 13% this month from 15% two months ago. 

Will our investors expect a lower or higher return after the divestiture based on the difference in the expected return of our stock before and after the divestiture?

Reference answers:
The expected return of a stock can be calculated using the CAPM formula, which is as follows:

E(R) = rf  + β (rm  - rf)

- rf is the risk-free return
- rm is the market return
- β is the beta which is the volatility in the return of a stock compared to the market.

and 

Beta = Correlation (Ri  - Rm) * σi  / σm

Here: 

- Correlation (Ri  - Rm) is the correlation between the return of a stock and the market return.
- σi is the standard deviation of the return of the stock.
- σm is the standard deviation of the market returns.

# Expected return before the divestiture

- E(R) = rf  + β (rm  - rf)
- rf is the risk-free return = 4%
- rm is the market return = 18%
- Beta = Correlation (Ri  - Rm) * σi  / σm  = 0.5 * 0.30 / 0.15 = 1
- E(R) = rf  + β * (rm  - rf) = 4% + 1 * (18% - 4%) = 18%

# Expected return after the divestiture

- E(R) = rf  + β * (rm  - rf)
- rf is the risk-free return = 4%
- rm is the market return = 19.75%
- Beta = Correlation (Ri  - Rm) * σi  / σm  = 0.6 * 0.40 / 0.13 = 1.8
- E(R) = rf  + β * (rm  - rf) = 4% + 1.8 * (19.75% - 4%) = 32.39%

# Result

Based on the calculation the investors will demand a higher expected return.