Question

1. A stock has a beta of 0.79, the expected return on the market is 11%, and the risk-free rate is 1.5%. Calculate the expected return on the stock. (Enter percentages as decimals and round to 4 decimals)
2. A stock has an expected return of 20%, the risk-free rate is 1.5%, and the market risk premium is 8%. Calculate the beta of this stock. (Round to 3 decimals)
3. A stock has an expected return of 10%, its beta is 0.59, and the risk-free rate is 1.5%. Calculate the expected return on the market. (Enter percentages as decimals and round to 4 decimals)

Answer 1

a. The expected return is computed as shown below:

= risk free rate + Beta ( return on market - risk free rate)

= 0.015 + 0.79 ( 0.11 - 0.015)

= 0.0901 Approximately

b. The beta is computed as follows:

return on stock = risk free rate + Beta x market risk premium

0.20 = 0.015 + beta x 0.08

Beta = 2.313 Approximately

c. The expected return on market is computed as follows:

return on stock = risk free rate + Beta x (return on market - risk free rate)

0.10 = 0.015 + 0.59 ( return on market - 0.015)

return on market = 0.1591 Approximately