Question

Saved Save& Exit Submit Help Check my work Investors expect the market rate of return this year to be 20.00 %. The expected rate of return on a stock with a beta of 1.4 is currently 28.00%. If the market return this year turns out to be 18.00 % , how would you revise your expectation of the rate of return on the stock? (Do not round intermediate calculations. Round your answer to 1 decimal place.) Revised rate of retum 10 of 22 Next Prev NOV XP 4

Answer 1

Market return , Rm = 20% Beta = 1.4 Expected return of stock, RR = 28% RR = Rf + Beta * (Rm - Rf) 28% = Rf + 1.4 * (20% - Rf) 28% = Rf + 28% - 1.4 * Rf 28% -28% = -0.4 * Rf 0 = -0.4 * Rf Risk free rate, Rf = 0 Expected return of market, Rm = 18% Revised return of stock, RR = Rf+ Beta * (Rm - Rf) = 0 + 1.4 * (18% - 0) = 25.2 % Ans: Revised rate of return, RR = 25.2 %