Question

The common stock of Flavorful Teas has an expected return of 14.31 percent. The return on the market is 9 percent and the risk-free rate of return is 3.1 percent. What is the beta of this stock

Answer 1

Answer:

the beta of this stock is 1.90.

Explanation:

The Expected Return of a Equity stock is the cost of equity to the company.

The cost of equity can be determined by using the Capital Asset Pricing Model (CAPM) as follows :

Cost of Equity = Return on a risk free security + Beta × Market Risk Premium

Where,

Market Risk Premium = Return on Market -  Return on a risk free security

14.31 % = 3.10 % + Beta × (9.00 % - 3.10 %)

14.31 % = 3.10 % + Beta × 5.90 %

11.21 % = Beta × 5.90 %

Beta = 1.90