Question

A stock has a beta of .85 , the expected return on the market is 19 percent, and the risk-free rate is 3.80 percent. What must the expected return on this stock be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

Using the Capital Asset Pricing Model (CAPM), the expected return on a stock with a beta of .85, a market return of 19%, and a risk-free rate of 3.80% is calculated to be 16.72%.

Step-by-step explanation:

The expected return on a stock can be calculated using the Capital Asset Pricing Model (CAPM). The formula for CAPM is given by:

Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)
Given that a stock has a beta of .85, an expected return on the market of 19%, and a risk-free rate of 3.80%, you can plug these values into the CAPM formula to find the expected return:

Expected Return = 3.80% + .85 * (19% - 3.80%) = 3.80% + .85 * 15.20% = 3.80% + 12.92% = 16.72%

Therefore, the expected return on this stock should be 16.72% percent.