Question

The risk-free rate is 2.2 percent, and the market risk premium is 7.1 percent. What is the expected rate of return on a stock with a beta of 1.38?

A. 6.76 percent
B. 8.96 percent
C. 12.00 percent
D. 1

Answer 1

The expected rate of return on a stock with a beta of 1.38, given a risk-free rate of 2.2 percent and a market risk premium of 7.1 percent, is C. 12.00 percent. This is calculated using the Capital Asset Pricing Model (CAPM) formula.

Step-by-step explanation:

The expected rate of return on a stock with a beta of 1.38, given a risk-free rate of 2.2 percent and a market risk premium of 7.1 percent, is C. 12.00 percent.

According to the Capital Asset Pricing Model (CAPM), the expected return on an investment is calculated as the risk-free rate plus the product of the investment's beta and the market risk premium. In formula terms, this is:

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

In this scenario:

• Risk-Free Rate = 2.2%
• Beta = 1.38
• Market Risk Premium = 7.1%

So, the expected rate of return would be:

2.2% + (1.38 x 7.1%) = 2.2% + 9.798% = 11.998%

Rounded to two decimal places, the expected rate of return is 12.00 percent.