A stock has a beta of 1.38, the expected return on the market is 10 percent,...

Question

Question

A stock has a beta of 1.38, the expected return on the market is 10 percent, and the risk- free rate is 5 percent. What must

Answer 1

Answer #1

expected return on stock = risk free return + (beta of stock * market risk premium)

expected return on market is 10% and risk free rate is 5%. As the beta for market is 1, the market risk premium is 10% - 5% i.e. 5%

expected return on stock = 5% + (1.38 * 5%)

expected return on stock = 5% + 6.90%

expected return on stock = 11.90%

Answer 2

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