A stock has an expected return of 12.6 percent, its beta is 1.30, and the risk-f

Question

A stock has an expected return of 12.6 percent, its beta is 1.30, and the risk-free rate is 2.5 percent. What must the expected return on the market be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

A stock has an expected return of 12.6 percent, its beta is 1.30, and the risk-free rate is 2.5 percent. What must the expected return on the market be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

Explanation / Answer

Answer:

To calculate expected market return we should use formula of CAPM, which is as follows

Expected rate of return = Risk free rate + (Market return - Risk free rate) Beta of stock

12.6 = 2.5 + (Market return - 2.5)1.30

12.6 -2.5 = (market return - 2.5) 1.30

10.1/1.30 = Market return - 2.5

7.77 = Market return - 2.5

7.77+2.5 = Market return

10.87% = Market return

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