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A stock has an expected return of 10.2 percent, the risk-free rate is 5 percent, and...

A stock has an expected return of 10.2 percent, the risk-free rate is 5 percent, and the market risk premium is 9 percent. What must the beta of this stock be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Multiple Choice .5778 .7562 .5168 .4333 .6008

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Answer #1

We know the CAPM formula to find the expected return. (CAPM stands for Capital Asset Pricing Model)

Where,
ER = Expected Return
Rf = Risk Free rate
Rp = Market Risk Premium
= Beta of the stock

Substituting the values, we get:

.

.

Note: Rp = Rf - Rm

Where, Rm = Market risk, since the problem given the market risk premium directly, we did not use the full formula.

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