Question

consider the capm. the risk-free rate is 6%, and the expected return on the market is 17%. what is the expected return on a stock with a beta of 1.6?

Answer 1

Using the CAPM formula, the expected return on a stock with a beta of 1.6, a risk-free rate of 6%, and an expected market return of 17% is calculated to be 23.6%.

Step-by-step explanation:

To calculate the expected return on a stock using the Capital Asset Pricing Model (CAPM), we apply the formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate).

Given that the risk-free rate is 6%, the expected return on the market is 17%, and the stock's beta is 1.6, we can substitute these values into the formula.

Expected Return = 6% + 1.6 * (17% - 6%)

= 6% + 1.6 * 11%

= 6% + 17.6%

= 23.6%

Therefore, the expected return on the stock with a beta of 1.6 is 23.6%.