Question

4) Assume that a stock has a beta of 1.5, the risk free interest rate is 4%,a and the market return is 6%. Find the stock return (expected return).

Answer 1

Solution:

Given:

Stock’s Beta = 1.5

Risk Free Interest Rate = 4 %

Market Return = 6 %

To Calculate:

The Stock Return (Expected Return)

Formula:

Expected Return of Stock: -

ERs= Rf + βs (Rm - Rf)

Where:

ERs = Expected Return of Stock

Rf = Risk Free Interest Rate

βs= Beta of Stock

Rm = Market Return

Here:

Rf= 4 %, βs = 1.5, Rm = 6 %

On putting these value in the formula, we get,

ERs = 4 + 1.5 (6 - 4)

ERs = 4 + 1.5 (2)

ERs = 4 + 3

ERs = 7 %

The Expected Return of Stock = 7 %

Ans: The Stock Return (Expected Return) = 7 %