Question

Seenbreeze incorporated has a beta 1.0. If the expected return on the marked is %15, what is the expected return on seebreeze incorporated a stock?

Answer 1

Solution:

Given That

Beta = 1.0

Expected return on market = 15%

We have to calculate the expected return on stock. To calculate this, we use the CAPM (Capital Asset Pricing Model) equation

Required Return r = r_f + β(r_m – r_f)

= r_f + 1.0(0.15 - r_f )

= r_f + 0.15 - r_f

= 0.15 or 15%

Therefore expected return = 0.15 or 15%

Explanation:

The expected return of a stock with a β = 1.0 must, on average, be the same as the expected return of the market which also has a β = 1.0.