Question

A stock has a beta of 1.24, the expected return on the market is 11.8 percent, and the risk-free rate is 4.55 percent. What must the expected return on this stock be? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Expected return %

Answer 1

Answer:

The expected return on this stock must be 13.54%

Explanation:

We use the Capital asset pricing model to calculate the expected return on the stock.

ERi  = Rf  +βi  (ERm  − Rf )

Where,

ERi = Expected return on investment

Rf = Risk-free rate = 4.55%

βi = Beta of the investment = 1.24

ERm  = Expected return on the market = 11.8%

ERi  = Rf  +βi  (ERm  − Rf )

ERi = 4.55 + 1.24 ( 11.8% - 4.55% )

ERi = 13.54%