Question

ABC, Inc., has a beta of 1.77. The risk-free rate is 4.02% and the market risk premium (=expected return on market portfolio minus risk-free rate) is 5.46%. What is the required rate of return on ABC's stock?

Answer 1

We need to obtain the required rate of return on ABC's stock
Given Information about the ABC Inc

• Risk-Free Rate = 4.02%
• Market Risk Premium = Market Return of Stock - Risk Free Return = 5.46%
• Beta = 1.77

We need to implement the Capital Asset Pricing Model (CAPM) for calculating the Stock Return.

Expected Stock Return = Risk-Free Rate + (Beta x Market Risk Premium)

Expected Return = 4.02% + (1.77x 5.46%)

Expected Return = 4.02% + (1.77x 5.46%)

Expected Return = 4.02% + 9.6642%= 13.6842%

13.68% is the required rate of return on ABC's stock.

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