Question

Assume that the risk-free rate is 2.5% and the required return on the market is 13%. What is the required rate of return on a stock with a beta of 0.8? Round your answer to two decimal places.

Answer 1

Ans :

According to Capital asset pricing model,

E(r) = Rf + Beta*(M(r) –Rf)

E(r) = Expected rate of return = ?

Rf = Risk free return = 2.5 %

Beta = 0.8

M(r) = Market return = 13 %

Insert above data in the formula, E(r) = Rf + Beta*(M(r) –Rf)

E(r) = 2.5 % + 0.8 ( 13% - 2.5 %)

E(r) = 2.5 % + 0.8 * 10.5

E(r) = 2.5 % + 8.4 %

E(r) = 10.9 %