Question

A stock has an expected return of 11.9 percent, its beta is .94, and the risk-free rate is 5.95 percent. What must the expected return on the market be? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Market expected return %

Answer 1

Answer:

The market expected return is 12.28%

Explanation:

According Miller and Modgliani Capital Asset Pricing Model,the expected return on a stock is given by the formula below:

Ke=Rf+Beta(Market expected return-Rf)

Rf is the risk free-rate of return

Ke=11.9%

Beta=0.94

risk-free rate of return=5.95%

11.9%=5.95%+0.94(MER-5.95%)

11.9%=5.95%+0.94MER-5.593 %

11.9%=0.357 %+0.94MER

11,9%-0.357%=0.94MER

11.543 %=0.94MER

MER=11.543%/0.94

MER=12.28%

The market expected rate having Miller and Modgiliani CAPM formula is 12.28%