Question

you're thinking of buying a stock priced at $98 per share. Assume that the risk-free rate is about 4.4% and the market risk premium is 6.1%. If you think the stock will rise to $115 per share by the end of the year, at which time it will pay a $2.97 dividend, what beta would it need to have for this expectation to be consistent with the CAPM?

Answer 1

Buying value = $ 98 per share

Sell value = $ 115 per share

Dividend Received = $2.97

Expected Return from stock = [(Sell value - Buying value)+ Dividend Income]/Buying value

= [(115-98)+2.97]/98

= 20.38%

Since, the expectation of the Stock return is to be consistent with the CAPM, Taking expected return as Required rate of return to compute Beta:

Rf = Risk free Return = 4.4%

RMP = Market Risk Premium = 6.1%

Required rate of Return = 20.38%

Beta = 2.62

So, Beta of stock is 2.62