Investors expect the market rate of return this year to be 10%. The expected rate of...
Investors expect the market rate of return this year to be 10%. The expected rate of return on a stock with a beta of 1.2 is currently 12%. If the market return this year turns out to be 8%, how would you revise your expectation of the rate of return on the stock?
Homework Answers
An assumption is made that the risk free rate is 0%.
The expected return on a stock is calculated using the Capital Asset Pricing Model (CAPM)
The formula is given below:
Ke=Rf+
*[E(Rm)-Rf]
Where:
Rf=risk-free rate of return
Rm=expected rate of return on the market.
Rm-Rf= Market risk premium
=
Stock’s beta
Expected rate of return would be revised to= 1.2*8%
= 9.6%.
In case of any query, kindly comment on the solution.
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