Question

The risk-free rate is 1.61% and the market risk premium is 4.90%. A stock with a β of 1.45 will have an expected return of ____%.

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Answer format: Percentage Round to: 2 decimal places (Example: 9.24%, % sign required. Will accept decimal format rounded to 4 decimal places (ex: 0.0924))

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#3

The risk-free rate is 1.95% and the expected return on the market 10.77%. A stock with a β of 1.41 will have an expected return of ____%.

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Answer format: Percentage Round to: 2 decimal places (Example: 9.24%, % sign required. Will accept decimal format rounded to 4 decimal places (ex: 0.0924))

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#4

A stock has an expected return of 18.00%. The risk-free rate is 2.00% and the market risk premium is 8.72%. What is the β of the stock?

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Answer 1

The expected return is computed as shown below:

= risk free rate + beta x market risk premium

= 0.0161 + 1.45 x 0.0490

= 8.72% Approximately

The expected return is computed as shown below:

= risk free rate + beta x (return on market - risk free rate)

= 0.0195 + 1.41 x (0.1077 - 0.0195)

= 14.39% Approximately

The beta is computed as shown below:

Expected return = risk free rate + beta x market risk premium

0.18 = 0.02 + beta x 0.0872

beta = 0.16 / 0.0872

beta = 1.83 Approximately