Question

if the interest rate on treasury bills is 4% and the market risk premium is 9%, then a stock with a beta of 1.5 would be expected to return:

Answer 1

The stock with a beta of 1.5 would be expected to return 16.5%.

Step-by-step explanation:

The expected return on a stock can be calculated using the Capital Asset Pricing Model (CAPM):

Expected Return = RiskFreeRate + (Beta × Market Risk Premium

In this case, the risk-free rate is the interest rate on Treasury bills, which is 4%, and the market risk premium is given as 9%. The beta of the stock is 1.5. Substituting these values into the formula:

Expected Return = 4% + (1.5 × 9%)

Expected Return = 4% + 13.5%

Expected Return = 17.5%

However, it's important to note that this is the nominal expected return. To get the real expected return, you would subtract the expected inflation rate. If we assume an inflation rate of 1.0%, the real expected return would be:

Real Expected Return = 17.5% - 1.0%

Real Expected Return = 16.5%

This means that, accounting for inflation, the stock with a beta of 1.5 would be expected to return 16.5%.