Question

A stock with a beta of 1.2 has an expected rate of return of 16%. If the market return this year turns out to be 10 percentage points below expectations, what is your best guess as to the rate of return on the stock?

Answer 1

rate of return on the stock is 4%

Step-by-step explanation:

given data

stock beta = 1.2

expected rate of return = 16%

market return = 10%

to find out

rate of return on the stock

solution

we get here rate of return on the stock hat is express as

rate of return on the stock = expected rate of return - ( stock beta × market return ) ...........................1

put here value we get

rate of return on the stock = 16 % - ( 1.2 × 10% )

rate of return on the stock = 0.16 - ( 1.2 × 0.10 )

rate of return on the stock = 0.16 - 0.12

rate of return on the stock = 0.04

rate of return on the stock is 4%