Question

16,17,18

stock has a beta of 1.5, the expected return on the market is 11 percent, and the risk- Free rate is 3.85 percent. What must the expected return on this stock be? Multiple Choice 15.16% O 20.35% O 13.85% O 15.3% O

Answer 1

Answer to first question in the list: Option-(b): 20.35% Workings: Using CAPM, Expected return on stock = Risk-free Rate +(Beta x Market Risk Premium) Expected return on stock = 3.85% +(1.5 x 11%) Expected return on stock = 3.85% + 16.5% Expected return on stock = 20.35% Actual answer should be: Using CAPM, Expected return on stock = Risk-free Rate + (Beta x Market Risk Premium) Expected return on stock = Risk-free Rate + [Beta x (Market Return - Risk-free Rate)] Expected return on stock = 3.85% + [1.5 x (11% -3.85%)] Expected return on stock = 3.85% + [1.5 x 7.15%] Expected return on stock = 3.85% + 10.73% Expected return on stock = 14.58% --> It is not available in the options provided and so answer of first calculation is taken up.