Question

The risk-free rate is 3.4 percent and the market expected return is 11.9 percent. What is the expected return of a stock that has a beta of 1.19?

a) 17.56%
b) 19.02%
c) 15.54%
d) 13.52%
e) 12.01%

Answer 1

The expected return of the stock can be found using the Capital Asset Pricing Model (CAPM). With the given risk-free rate of 3.4%, market expected return of 11.9%, and beta of 1.19, the calculation yields an expected return of approximately 13.52% for the stock.

Step-by-step explanation:

The question asks about the expected return of a stock given the risk-free rate, the market expected return, and the stock's beta. This can be calculated using the Capital Asset Pricing Model (CAPM), which is expressed as:

Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)

Plugging in the values provided:

Expected Return = 3.4% + 1.19 * (11.9% - 3.4%)

Expected Return = 3.4% + 1.19 * 8.5%

Expected Return = 3.4% + 10.115%

Expected Return = 13.515%

Rounding that to the nearest hundredth gives us an expected return of 13.52%%. Therefore, the correct answer is d) 13.52%.