Question

If the risk-free rate is 7 percent, the expected return on the market is 10 percent, and the expected return on Security Jis 13 percent, what is the beta of Security)?

please show work in written form (not excel) thank you.

Answer 1

Formual for Return on Security J is as below

Rj = Rf + β ( Rm - Rf)

Rj = Expected Return on Security J = 13%

Rm = Return on the Market = 10%

Rf = Risk free Rate = 7%

β = Beta of Security J

Substituting these values in the above formual, we will get value of Beta of Security J

13% = 7% + β (10% - 7%)

13% = 7% + β 3%

β 3% = 6%

β = 2

β > 1 , Stock is more volatile than market