Information provided:
Risk free rate= 3.6%
Expected return on the market= 9%
Beta= 1.3
The expected return on the stock is calculated using the Capital Asset Pricing Model (CAPM)
The formula is given below:
Ke=Rf+[E(Rm)-Rf]
where:
Rf=risk-free rate of return which is the yield on default free debt like treasury notes
Rm=expected rate of return on the market.
= Stock’s beta
Ke= 3.6% + 1.3*(9% - 3.6%)
= 3.6% + 7.02%
= 10.62%.
In case of any query, kindly comment on the solution.
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