Question

The? risk-free rate is 4.3?% and you believe that the? S&P 500's excess return will be

11.9?% over the next year. If you invest in a stock with a beta of

1.2 ?(and a standard deviation of 30?%), what is your best guess as to its expected excess return over the next? year?

The expected excess return over the next year is ____%.

?(Round to two decimal? places.)

Answer 1

Answer

Before Answering the Question , let us Understand some Important terms in simple language :

• Market Excess Reture : it is basically that how much Market Return will be "Over & Above" Riskfree Rate
• Beta : it shows that How much times is Risk of Our Stock in Comparison to that of Market . So We would be Expecting "that much times" Excess Return from that of "Market Excess Return"

?Now in Our Question it is Given that

• Expected Excess Market Return (Rm - Rf) over next year = 11.9%
• Beta of pur Stock = 1.2

Our Expected Excess Return over next year = Beta * Expected Excess Market Return

= 1.2 * 11.9%

= 14.28 %

So since our Risk was "1.2 times" to the Risk of Market Hence Out Expected Return would also be 1.2 times.

IF ANY DOUBT PLEASE ASK IN COMMENT :)