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grin007 [14]
2 years ago
15

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?
Business
1 answer:
Ad libitum [116K]2 years ago
8 0

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%

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