Question

3. If a stock has a ? of 1.5, the return on the market is 10%, and the risk-free rate of return is 5%, what expected rate of return should this stock offer according to the Capital Asset Pricing Model (CAPM)? If the expected value of the stock is $100, what price should the stick be selling for today?

Answer 1

Expected rate of return = Rf+ [Beta( Rm-Rf)]

                = 5+ [1.5(10-5)]

                = 5 + [1.5 * 5]

                = 5 + 7.5

                = 12.50%

Price at which stock selling today = Expected price /(1+r)

                  = 100 /(1+.125)

                  = 100 / 1.125

                  = $ 88.89 per share