3. value: 7.69 points A stock has an expected return of 12.5 percent, its beta i

Question

3.

value:
7.69 points

A stock has an expected return of 12.5 percent, its beta is 1.35, and the risk-free rate is 5.5 percent. What must the expected return on the market be? (Round your answer to 2 decimal places. (e.g., 32.16))

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A stock has an expected return of 12.5 percent, its beta is 1.35, and the risk-free rate is 5.5 percent. What must the expected return on the market be? (Round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Expected Rate of Return=Riskfree Rate+Beta*(Market Portfolio Rate-Riskfree Rate)

or 12.5 = 5.5 + 1.35*(Market Portfolio Rate - 5.5)

or 12.5-5.5 = 1.35*Market Portfolio Rate - 5.5*1.35

or Market Portfolio Rate=(7+5.5*1.35)/1.35=10.68%

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