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The current 3-month Treasury Bill rate is 3%. If the expected market return is 7% and...

The current 3-month Treasury Bill rate is 3%. If the expected market return is 7% and a company's stock has a beta of 1.3, what is the expected return for that company's stock?
Group of answer choices

8.03%

7.75%

8.20%
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Answer #1

We will use CAPM (Capital Asset Pricing Method) to compute company's return.

CAPM Return (Ke) = Risk free return + [Beta * (Market return - Risk free return)]

Risk free return = return on Treasury Bill = 3%

CAPM Return (Ke) = 3% + [1.3 * (7% - 3%)]

CAPM Return (Ke) = 8.2%

Thus, Option (c) is the correct answer,

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