Question

A stock with a beta of 1.8 has an expected rate of return of 16%. If the market return this year turns out to be 6 percentage points below expectations, what is your best guess as to the rate of return on the stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)

Answer 1

Answer:

5.2%

Explanation:

A stock has a beta of 1.8

The expected rate of return is 16%

= 16/100

= 0.16

The market return turns out to be 6% below the expection

The first step is to calculate the decrease in the expected return

= beta× decrease in the market return

= 1.8× 6/100

= 1.8 × 0.06

= 0.108

Therefore the rate of return inn the stock can be calculated as follows

= 0.16-0.108

= 0.052×100

= 5.2%

Hence the rate of return on the stock is 5.2%