A stock has an expected return of 12.60%, the risk-free rate is 3.55%, the market risk premium is 8.10%. What must be the beta of this stock ?
Expected return on the stock formula:
\(E R=R_{f}+\beta\left(R_{m}-R_{f}\right)\)
Where, \(\mathrm{ER}=\) Expected return
\(\mathrm{Rf}=\) Risk-free rate
\(\beta=\) Beta
\(\mathrm{Rm}=\) Expected return on the market (Rm - Rf) = Market risk premium
Therefore,
\(0.1260=0.0355+\beta(0.081)\)
\(\beta(0.081)=0.1260-0.0355\)
\(\beta(0.081)=0.0905\)
\(\beta=\frac{0.0905}{0.081}\)
\(=1.11728\)
OR
\(=1.12..._{\text { (rounding up to } 2 \text { decimals) }}\)
Therefore, the beta of this stock is 1.12 .
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