Question

The risk-free rate is 4%, the market risk premium is 8%, and the market return is 12%. Stock Y's beta is 1.85 and the standard deviation of its returns is 60%. What should be the stock's expected rate of return to make the investor indifferent toward buying or selling the stock?

Answer 1

Answer:

18.80%

Explanation:

Data given

Risk free rate = 4%

Beta = 1.85

Market return = 12%

The computation of rate of return is shown below:-

Using CAPM

Rate of Return = Risk free rate + Beta × (Market return- Risk free rate)

= 4% + 1.85 × (12% - 4%)

= 4% + 1.85 × 8%

= 4% + 14.8%

= 18.80%

Therefore for computing the rate of return we simply applied the above formula.