Final answer:
The expected return of a stock with a beta of 1.51, a risk-free rate of 2.5 percent, and a 7 percent market risk premium is calculated using the CAPM formula to be 13.07 percent.
Step-by-step explanation:
To calculate the expected return of a stock with a given beta, we use the Capital Asset Pricing Model (CAPM). The formula for CAPM is:
Expected Return = Risk-Free Rate + Beta × Market Risk Premium
Given that the beta of the stock is 1.51, the risk-free rate is 2.5 percent, and the market risk premium is 7 percent, the calculation is as follows:
Expected Return = 2.5% + (1.51 × 7%)
Expected Return = 2.5% + 10.57%
Expected Return = 13.07%
Hence, for a stock with a beta of 1.51, the expected return with the given market conditions would be 13.07 percent.