Investors expect the market rate of return this year to be 16%. A stock with a b

Question

Investors expect the market rate of return this year to be 16%. A stock with a beta of 1.9 has an expected rate of return of 28%. If the market return this year turns out to be 12%, what is the rate of return on the stock? (Do not round intermediate calculations. Round your answer to 1 decimal place.)

Investors expect the market rate of return this year to be 16%. A stock with a beta of 1.9 has an expected rate of return of 28%. If the market return this year turns out to be 12%, what is the rate of return on the stock? (Do not round intermediate calculations. Round your answer to 1 decimal place.)

Explanation / Answer

step1: find risk free rate

=>

28% = rf + 1.9 * (16% -rf)

=>

rf = 2.67%

step2

stock return = 2.67% + 1.9 * (12% -2.67%) = 20.40%

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