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A stock is priced at $15.32 today, and analysts have a view that the stock will...

A stock is priced at $15.32 today, and analysts have a view that the stock will trade at $17.78 in one year. The stock will not pay a dividend. The current risk free rate in the economy is 5.00% while the market portfolio risk premium is 7.00%. If the stock is fairly priced, what is the implied beta for the stock?

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Answer #1

Required return on stock = (Final Stock Price - Initial Stock Price)/Initial Stock Price = (17.78 - 15.32)/15.32 = 16.0574%

Based on CAPM,

Required return = Risk free rate + Beta * Market risk premium

16.0574% = 5% + Beta * 7%

Beta = 1.58 ---> Answer

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