Question

A stock has a beta of 1.05, the expected return on the market is 14 percent, and the risk-free rate is 7.7 percent. What must the expected return on this stock be?

Answer 1

The expected return on the stock as per the CAPM Model is :

Re = Rf + beta*(Rm - Rf)

Where Rf is the risk free rate,

Rm is the return on the market

(Rm - Rf) is the market risk premium

= 7.7 + 1.05*(14 - 7.7)

= 14.31%

So, the expected return on the stock is 14.31%.