Question

The risk-free rate of return is 2.7 percent, the inflation rate is 3.1 percent, and the market risk premium is 6.9 percent. What is the expected rate of return on a stock with a beta of 1.08

Answer 1

Answer:

10.15%

Explanation:

Using the CAPM formula, we can calculate cost of equity or in this case, the expected rate of return:

expected rate of return = risk free rate x [beta x (market rate of return - risk free rate)]

where market rate of return - risk free rate = market risk premium

expected rate of return = 2.7% x (1.08 x 6.9%) = 10.15%

Answer 2

The expected rate of return is 10.15%

The calculation can be done as follows

Risk free rate= 2.7%

Inflation rate= 3.1%

Market risk premium= 6.9%

Beta= 1.08%

Therefore the expected rate of return can be calculated as follows

= Risk free rate of return₊ (Beta ×  Market risk premium)

= 2.7(1.08 × 6.9)

= 2.7  ₊ 7.452

= 10.15%

Hence the expected rate of return on the stock is 10.15%

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