Question

You are holding a stock that has a beta of 2.93 and is currently in equilibrium. The required return on the stock is 35.24%, and the expected return on the market portfolio is 15.30%. What would be the expected return on the stock if the expected market return increased to 21.00% while the risk-free rate and beta remained unchanged?

51.94%

66.50%

35.24%

60.37%

42.27%

Answer 1

CAPM Equation

Re = Rf + * (Rm - Rf)

Re = required return on stock  

= beta

Rf = risk-free rate

Rm = return on the market portfolio  

Re	35.24%
Rm	15.30%
Beta	2.93
Rf	?

35.24%

=

Rf

+

2.93*(15.30%-Rf)

Substituting the values we get Rf = 4.97%

Now we have the risk-free rate = 4.97%

Substitute the values again in the formula, we get

Re = 4.97% + 2.93*(21% - 4.97%)

Re = 4.97% + 2.93*(16.03%)

Re = 4.97% + 46.97%

Re = 51.94% .........Answer