Homework Help! You are analyzing a stock that has a beta of 1.20. The risk-free rate...

Question

Question

Homework Help!

Answer 1

Answer #1

As per CAPM Model,

Expected return = Risk Free Rate + Beta of Stock(Market Risk Premium)

= 5% + 1.20*(6.0%)

= 12.2%

Expected Return as per CAPM = 12.2%

- Should you buy the Stock?

Since, Expected Return is 12.2% while Stock Return is 11 %.

You Should not Buy the Stock because the expected return based on beta is greater than return on Stock. Hence, NO

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Answer 2

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