Question

The risk-free rate is 4.75% and the expected return on the market 10.05%. A stock with a β of 1.25 will have an expected return of ____%.

Answer 1

The expected return of a stock with a beta of 1.25 can be calculated using the Capital Asset Pricing Model (CAPM). The expected return is 11.56%.

Step-by-step explanation:

The expected return of a stock with a beta of 1.25 can be calculated using the Capital Asset Pricing Model (CAPM). According to CAPM, the expected return of a stock is equal to the risk-free rate plus the product of the stock's beta and the market risk premium. The risk-free rate in this case is 4.75% and the expected return on the market is 10.05%. So, the expected return of the stock with a beta of 1.25 would be:

Expected Return = Risk-Free Rate + (Beta * Market Risk Premium) = 4.75% + (1.25 * (10.05% - 4.75%)) = 11.56%

Therefore, the expected return of the stock with a beta of 1.25 is 11.56%.