A stock has an expected return of 9%, the risk-free rate is 5.5%, and the market...

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Question

A stock has an expected return of 9%, the risk-free rate is 5.5%, and the market risk premium is 3.0%. What must the beta of this stock be?

Round to the FIRST decimal point

Answer 1

Answer #1

Calculation of the Beta of the stock

Here, we’ve Risk-free rate = 5.5%

Market risk premium = 3.0%

Expected rate of return on the stock = 9.0%

A per Capital Asset Pricing Model [CAPM], the Expected rate of return on the stock is calculated by using the following equation

The Expected rate of return on the stock = Risk-free rate + [Beta x Market risk premium]

9.0% = 5.5% + [Beta x 3.0%]

9.0% - 5.5% = Beta x 3.0%

3.5% = Beta x 3.0%

Therefore, the Beta = 3.5% / 3.0%

Beta = 1.2

“Hence, the Beta of this stock will be 1.2”

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Answer 2

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