Question

investors expect the market rate of return this year to be 15.50%. the expected rate of return on a stock with a beta of 1.4 is currently 21.70%. if the market return this year turns out to be 12.90%, how would you revise your expectation of the rate of return on the stock? (do not round intermediate calculations. round your answer to 1 decimal place.)

Answer 1

18.06% is the anticipated rate of return for the stock.

What expected rate of return is there for the stock?

The amount of profit or loss an investor might expect to experience as a result of an investment is known as the expected return. When calculating an expected return, potential outcomes are multiplied by the likelihood that they will occur before being added together. It is impossible to guarantee expected results.

To give an investor a sense of the likely profit vs. risk trade-off, the expected return on investment is calculated. The investor now has a baseline against which to evaluate the risk-free rate of return.

Ke = Rf + beta (Mrp - Rf)

Rf = x

Mrp= 15.50%

Ke = 21.70%

beta= 1.4

21.70%= x +1.4 (15.50% - x)

21.70%= x + 21.70% - 1.4x

21.70% - 21.70%= Rf - 1.4x

0%= -0.4x

Rf= 0%/ -0.4

Rf= 0%

When Mrp is 12.90%, beta is 1.4, and Rf is 0%, we can now calculate Ke by changing the value of Rf in the original formula.

Ke= 0% + 1.4(12.90% - 0%)

Ke=0% + 18.06% + 0%

Ke=18.06%

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