Question

A stock has a beta of 1.5, the expected return on the market is 11 percent, and the risk-free rate is 7.15 percent. The expected return on this stock must be_________ percent. (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))

Answer 1

The quedtion is asked from the part of CAPITAL ASSET PRICING MODEL

using CAPM method ae are finding COST OF EQUITY simply or Return required by our SHAREHOLDERS OF COMPANY .

FORMULA IS

Cost of equity=risk free rate+[beta{marketrate-risk free rate}]

  ie , ke =Rf + [B×{Rm -Rf}]

from question substitute value

Rf = 7.15 , Rm = 11 ,B = 1.5

so

Expected return on stock = 7.15 +[1.5 × {11-7.15}]

   =12.92

note:

   when calculating ensure that firstly you are doing value inside bracket first , that is {11-7.15} , then nextly you should multiply with beta then the value should be add with Rf

  these all are basic stuffs in mathematics BOD MASS RULE.

But everyone went wrong becuase of careless . Please note this point in every calculation like this .

tbest of luck , thank you