Question

a. Compute the expected rate of return for Acer common​ stock, which has a 1.5 beta. The​ risk-free rate is 4.5 percent and the market portfolio​ (composed of New York Stock Exchange​ stocks) has an expected return of 10 percent. b. Why is the rate you computed the expected​ rate?

Answer 1

Answer:

(a) 12.75%

Explanation:

Given that,

Beta = 1.5

Risk-free rate = 4.5 percent

Expected return on market portfolio = 10 percent

Here, we are using CAPM:

(a) Expected rate of return for Acer common​ stock:

= Risk free rate + beta (Expected return on market Portfolio - Risk free rate)

= 4.5% + [1.5 (10% - 4.5%)]

= 0.045 + (1.5 × 0.055)

= 0.045 + 0.0825

= 0.1275 or 12.75%

(b) This rate is known as the fair rate which compensates the holder or investor for assuming the risk associated with it and for the time value of money.