If you want to invest into a stock A for one year, and given that during...
If you want to invest into a stock A for one year, and given that during this period the expected return of the S&P index is 25%, the risk-free rate in the market is 5% and stock A's sensitivity to the market risk is 0.5. compute the expected return of stock A that you want to invest.
Homework Answers
This question requires application of CAPM formula, according to which
Expected return on stock = Risk free rate + Beta * (Expected market return - Risk free rate)
Beta is the sensitivity of stock A to market risk.
Expected return on Stock A = 5% + 0.5 * (25% - 5%) = 5% + 10% = 15%
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