Question

The risk-free rate is 1.86% and the market risk premium is 7.30%. A stock with a β of 1.26 will have an expected return of ____%.

The risk-free rate is 3.87% and the expected return on the market 11.44%. A stock with a β of 1.26 will have an expected return of ____%.

A stock has an expected return of 14.00%. The risk-free rate is 1.17% and the market risk premium is 8.39%. What is the β of the stock?

Answer 1

a. The expected return is computed as follows:

= risk free rate + Beta x market risk premium

= 0.0186 + 1.26 x 0.073

= 11.06% Approximately

b. The expected return is computed as follows:

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

= 0.0387 + 1.26 x ( 0.1144 - 0.0387 )

= 13.41% Approximately

c. The beta of the stock is computed as follows:

= ( Expected return - risk free rate ) / market risk premium

= ( 0.14 - 0.0117 ) / 0.0839

= 1.53 Approximately

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