Question

n February 2017 the risk-free rate was 4.87 percent, the market risk premium was 7 percent, and the beta for Twitter stock was 1.43. What is the expected return that was consistent with the systematic risk associated with the returns on Twitter stock?

Expected return: %

Answer 1

Solution:

Expected return is calculated using the following formula:

Expected Return = R_F + [ β * ( R_M - R_F ) ]

Where

R_F = Risk free rate f return   ; β = Beta ;   ( R_M - R_F ) = Market risk Premium

As per the information given in the question we have

R_F = 4.87 %   ; ( R_M - R_F ) = 7 %   ; β = 1.4.3

Applying the above values in the formula we have

= 4.87 % + (1.43 * 7 % )

= 4.87 % + 10.01%

= 14.88 %   (When rounded off to two decimal places)

Thus the expected return that was consistent with the systematic risk associated with the returns on Twitter stock is = 14.88 %

Expected Return = 14.88 %