Question

a stock has a beta of .95, the expected return on the market is 21 percent, and the risk-free rate is 4.00 percent. what must the expected return on this stock be?

Answer 1

The expected return on a stock that has a beta of 0.95, the expected return on the market is 21%, and the risk-free rate is 4% would be 20.15%

What is expected return?

It is the profit or loss that an investor anticipates on an investment that has known historical rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totalling these results.

How to calculate the expected return of this stock?
Given from the question

Risk free rate = 4%

Market return = 21%

Beta = 0.95

Expected return on stock will be
E(r) = risk free rate + beta * (market return - risk free rate)

= 4% + 0.95 * (21% - 4%)
= 0.2015

= 20.15%

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