Question

A stock has a beta of 13, the expected return on the market is 9 percent, and the risk- free rate is 3.6 percent. What must t
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Answer #1

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+\beta[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.

\beta= 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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