Question

The common stock of Jensen Shipping has an expected return of 16.2 percent. The return on the market is 11.2 percent, the inflation rate is 3.1 percent, and the risk-free rate of return is 3.6 percent. What is the beta of this stock?
A. 1.33
B. 1.55
C. 1.44
D. 1.66

Answer 1

Answer: 1.66

Explanation:

Based on the information given in the question, the beta of the stock will be calculated as follows:

Expected return = 16.2%

Market return = 11.2%

Inflation rate = 3.1%

Risk-free rate of return = 3.6%

We should note that:

Expected return = risk-free rate + Beta × (market rate- risk-free rate)

Therefore,

16.2% = 3.6% + Beta × (11.2% - 3.6%)

16.2% = 3.6% + Beta × 7.6%

16.2% - 3.6% = Beta × 7.6%

12.6% = Beta × 7.6%

Beta = 12.6% / 7.6%

Beta = 1.66