Question

A stock has an expected return of 13 percent, the risk-free rate is 7 percent, and the market risk premium is 8 percent. what must the beta of this stock be?

Answer 1

Beta is 0.75.

The expected return = risk-free rate + Beta * (market risk premium)

13% = 7% + Beta * 8%
6% = Beta * 8%
Beta = 0.75

Here, since we know the expected return is 13% and the risk-free rate is 7% and the market risk premium is 8%, we solve for Beta using the CAPM formula.