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
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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