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A stock has a beta of 1.65, the expected return on the market is 10 percent,...

A stock has a beta of 1.65, the expected return on the market is 10 percent, and the risk-free rate is 6 percent. What must the expected return on this stock be?
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Answer #1

Information provided:

Risk free rate= 6%

Beta= 1.65

Expected return on market= 10%

The expected return on a stock is calculated using the Capital Asset Pricing Model (CAPM)

The formula is given below:

Ke=Rf+b[E(Rm)-Rf]

Where:

Rf=risk-free rate of return which is the yield on default free debt like treasury notes

Rm=expected rate of return on the market.

Rm-Rf= Market risk premium

b= Stock’s beta

Ke= 6% + 1.65*(10% - 6%)

     = 6% + 6.60%

     = 12.60%.

In case of any query, kindly comment on the solution.

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