Question

Based on your perception of Smith's riskiness, you will require a return of 8.5% on their stock. Smith's most recent beta is 1.20. The risk-free rate is currently 3.25%, while the market return is currently 7.75%. Based on these data, should you invest in Smith's stock

Answer 1

yes because smiths expected return exceeds your required return.

Risk free rate of return :

The risk-free rate of return is the theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time.

How do you calculate the real risk-free rate of return?

To calculate the real risk-free rate, subtract the current inflation rate from the yield of the Treasury bond that matches your investment duration. If, for example, the 10-year Treasury bond yields 2%, investors would consider 2% to be the risk-free rate of return.

What stock market means?

The term stock market refers to several exchanges in which shares of publicly held companies are bought and sold. Such financial activities are conducted through formal exchanges and via over-the-counter (OTC) marketplaces that operate under a defined set of regulations.

Learn more about stock market investments :

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