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Elena L [17]
3 years ago
5

A stock has an expected return of 10.2 percent, the risk-free rate is 3.9 percent, and the market risk premium is 7.2 percent. W

hat must the beta of this stock be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Business
1 answer:
marta [7]3 years ago
5 0

Answer:

Beta= 0.88

Explanation:

<em>The Capital Asset pricing Model (CAPM) can be used to determined the beta. </em>

<em>According to the Capital Asset pricing Model the return on equity is dependent on the level of reaction of the the equity to changes in the return on a market portfolio. </em>

These changes are captured as systematic risk. The magnitude by which a stock is affected by systematic risk is measured by beta.  

Under CAPM, Ke= Rf + β(Rm-Rf)  

Rf-risk-free rate (treasury bill rate), β= Beta, Rm= Return on market.  

Ke- expected return.

<em>Note that (Rm-Rf) is known as equity risk premium</em>

Using this model,  

10.2%= 3.9% + β× (7.2%)

0.102=0.039 + 0.072β

collect like terms

0.072β = 0.102 -0.039

0.072β = 0.063

Divide both sides by 0.072

 β = 0.063 /0.072

β= 0.875

Beta= 0.88

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