Question

The risk-free rate is 2.97% and the market risk premium is 7.29%. A stock with a β of 1.26 will have an expected return of ____%.

The risk-free rate is 3.09% and the expected return on the market 8.19%. A stock with a β of 1.00 will have an expected return of ____%.

Answer format: Percentage Round to: 2 decimal places (Example: 9.24%, % sign required. Will accept decimal format rounded to 4 decimal places (ex: 0.0924))

I would really appreciate the Help! :)

Answer 1

The expected return is computed by using the below formula:

Expected return = Risk free rate + Beta ( Risk premium )

= 0.0297 + 1.26 x 0.0729

= 0.1216 or 12.16% Approximately

The expected return is computed by using the below formula:

Expected return = Risk free rate + Beta ( Return on market - Risk free rate )

= 0.0309 + 1 ( 0.0819 - 0.0309 )

= 0.0819 or 8.19%

Feel free to ask in case of any query relating to this question