Question

The Riak-free rate is 5%. The beta of a stock is 1.2 . The market risk premium is 7%6. What does the investor requile for a return on this stock?

a) 7.22%
b) 13.4%
c) None of these are correct
d) 14.4%
e) 12%

Answer 1

Using the Capital Asset Pricing Model (CAPM) formula, the expected rate of return for the stock with given parameters is 13.4%.

Step-by-step explanation:

The question is asking for the expected rate of return for a stock investment based on the given risk-free rate, beta (a measure of the stock's volatility relative to the market), and the market risk premium. To calculate the expected return on the stock, we use the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + (Beta * Market Risk Premium).

Inserting the given values into the CAPM formula, we get:

Expected Return = 5% + (1.2 * 7%)

Expected Return = 5% + 8.4%

Expected Return = 13.4%

Thus, the correct answer is b) 13.4%.