Question

Assume the expected return on the market is 9 percent and the risk-free rate is 4 percent. (a1) What is the expected return for a stock with a beta equal to 1.80?

Answer 1

Answer:

r or expected rate of return = 0.13 or 13%

Explanation:

Using the CAPM, we can calculate the required/expected rate of return on a stock. This is the minimum return required by the investors to invest in a stock based on its systematic risk, the market's risk premium and the risk free rate.

The formula for required rate of return under CAPM is,

r = rRF + Beta * (rM - rRF)

Where,

• rRF is the risk free rate

• rM is the market return

r = 0.04 + 1.80 * (0.09 - 0.04)

r or expected rate of return = 0.13 or 13%