Question

Agilent Technologies had a beta of 1.53 last December. If the Treasury Bill rate of return was 2.3% and the S&P 500 return was 21.3% at that same time what should have been the expected return for Agilent?

Answer 1

Solution:

Expected return is calculated using the following formula:

E(R_P) = R_F + [ β * ( R_M - R_F ) ]

Where

E(R_P) = Expected Return   ; R_F = Risk free rate of return   ; β = Beta ;   R_M = Market rate of return

As per the information given in the question we have

R_F = Treasury Bill rate of return = 2.3 % ; R_M = S&P 500 return = 21.3 %   ; β = 1.53

Applying the above values in the formula we have

= 2.3 % + [ 1.53 * ( 21.3 % - 2.3 % ) ]

= 2.3 % + ( 1.53 * 19% )

= 2.3 % + 29.07 % = 31.37 % (When rounded off to two decimal places)

Thus Expected Return for Agilent = 31.37 %