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The market risk premium is 5.0 percent, and the risk-free rate is 4.9 percent. If the...

The market risk premium is 5.0 percent, and the risk-free rate is 4.9 percent. If the expected return on a bond is 6.0 percent, what is its beta?
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Answer #1

Beta of the Stock

Here, we’ve risk-free rate (Rf) = 4.90%

Market risk premium = 5.00%

Expected rate of return on the stock = 6.00%

A per Capital Asset Pricing Model [CAPM], the Expected rate of return on the stock is calculated by using the following equation

The Expected rate of return on the stock = Risk-free rate + [Beta x Market risk premium]

6.00% = 4.90% + [Beta x 5.00%]

6.00% - 4.90% = Beta x 5.00%

1.10% = Beta x 5.00%

Beta = 1.10% / 5.00%

Beta = 0.22

Hence, the Beta of the Stock will be 0.22

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