Question

You own a stock that has an expected return of 16.48 percent and a beta of 1.33. The U.S. Treasury bill is yielding 3.65 percent and the inflation rate is 2.95 percent. What is the expected rate of return on the market?

Answer 1

Answer:

The expected rate of return in the market 13.29%.

Explanation:

The expected rate of return on a stock is 16.48%.

The stock has a beta of 1.33.

The yield from treasury bill is 3.65%. Since treasury bills are risk free we will consider this risk free rate of return.

The inflation rate is 2.95%.

Expected return on stock=risk free rate+beta(market return-risk free rate)

16.48% = 3.65% + 1.33 (market return - 3.65% )

16.48% - 3.65% = 1.33 ( market return - 3.65% )

12.83% = 1.33( market return - 3.65% )

Market return - 3.65% = $\frac{12.83}{1.33}$

Market return - 3.65% = 9.64%

Market return = 9.64% + 3.65%

Market return = 13.29%