Question

A stock has an expected return of 13.2 percent, the risk-free rate is 8.5 percent, and the market risk premium is 10 percent. What must the beta of this stock be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer: 47% or 0.47

Step-by-step explanation:

From the question, we are told that the stock has an expected return of 13.2 percent, the risk-free rate is 8.5 percent, and the market risk premium is 10 percent.

We should note that the expected return is calculated as:

= Risk free rate + beta × market risk premium

Therefore,

13.2% = 8.5% + beta × 10%

0.132 = 0.085 + beta × 0.1

Beta = (0.132 - 0.085) / 0.1

Beta = 0.047 / 0.1

Beta = 0.47

Beta = 47%