Question

A stock has an expected return of 12.3 percent, the risk-free rate is 4.4 percent, and the market risk premium is 8.98 percent. What is the stocks beta ?

Answer 1

Stock's beta can be calculated by using CAPM according to which :

Expected Return = Risk Free Rate + Beta * Risk Premium

It is given that:

Expected Return = 12.3%

Risk Free Rate = 4.4%

Risk Premium = 8.98%

Let stock's beta is ''B''

Now, substituting the above values in the equation stated in the beginning:

12.3% = 4.4% + B * 8.98%

12.3% - 4.4% = B * 8.98%

7.9%              = B* 8.98%

7.9 / 8.98     = B

0.8797          = B

Stock's beta is 0.88 (after rounding off to 2 digits)