Question

The risk-free rate of return is 3.9 percent and the market return is 10.1 percent. What is the expected rate of return on a stock with a beta of 1.21? Question 4 options:

A) 12.47 percent

B) 10.92 percent

C) 11.40 percent

D) 12.79 percent

E) 12.22 percent

Answer 1

The Risk free rate refers to the rate where there is no risk on the underlying change in the value of investment.

Risk free rate = 3.9%

Market Return is the return received by investing the money in the market by bearing the risk associated with market

Market rate of return = 10.1%

Market risk premium is the difference between the market rate of return and risk free rate of return

Market risk premium = 10.1 - 3.9 = 6.2%

We can calculate the Expected rate of return on the stock with the following formula

Expected rate of return (r) = Risk free rate + ( Beta of the stock * market risk premium)

E (r) = 0.039 + ( 1.21 * 0.062)

   = 0.039 + 0.075

   = 0.1140 or 11.40%

So, the correct answer is option (C)