A stock has an expected return of 13.4 percent, the risk-free rate is 9 percent,

Question

A stock has an expected return of 13.4 percent, the risk-free rate is 9 percent, and the market risk premium is 10 percent. What must the beta of this stock be? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

A stock has an expected return of 13.4 percent, the risk-free rate is 9 percent, and the market risk premium is 10 percent. What must the beta of this stock be? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

CAPM:

Line or CAPM model is: Ri= Rf + Bi*(Rm-Rf) is the SML with slope (Rm-Rf) and intercept Rf with y axis as Ri and x axis as Bi.

where  Ri= ith Security return=13.4%=.134

Rf =risk-free rate=9%=.09, Bi =Beta of ith security=? and Rm-Rf= market risk premium=10%=.10

Ri= Rf + Bi*(market risk premium)

.134= .09 + Bi*(.10)

=>Bi=(.134-.09)/.10

=>Bi=0.44 must  the beta of this stock be.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.