Final answer:
To find the β (beta) of a stock, rearrange the CAPM equation and plug in the expected return of 12.00%, the risk-free rate of 3.54%, and the market risk premium of 7.46%, resulting in a beta of approximately 1.1342.
Step-by-step explanation:
The question asks to calculate the β (beta) of a stock given its expected return, the risk-free rate, and the market risk premium. The capital asset pricing model (CAPM) equation is used for this purpose: Expected Return = Risk-Free Rate + (Beta * Market Risk Premium). With the provided information, we can rearrange the equation to solve for the stock's beta (Beta = (Expected Return - Risk-Free Rate) / Market Risk Premium). By plugging in the values:
- Expected Return = 12.00%
- Risk-Free Rate = 3.54%
- Market Risk Premium = 7.46%
We get:
Beta = (12.00% - 3.54%) / 7.46% = 1.1342
Therefore, the beta of the stock is approximately 1.1342.