Question

The stock of Martin Industries has a beta of 1.43. The risk-free rate of return is 3.6 percent and the market risk premium is 9 percent. What is the expected rate of return?

a. 14.17%
b. 18.03%
c. 16.47%
d. 17.48%
e. 11.32%

Answer 1

The expected rate of return for Martin Industries, calculated using the CAPM formula with a beta of 1.43, a risk-free rate of 3.6%, and a market risk premium of 9%, is 16.47%.

Step-by-step explanation:

The question is asking to calculate the expected rate of return for Martin Industries using the given beta value, risk-free rate, and market risk premium. To find the expected rate of return, we use the Capital Asset Pricing Model (CAPM), which is represented by the formula:

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

Plugging in the given values:
Expected Return = 3.6% + 1.43 × (9%) = 3.6% + 12.87% = 16.47%

So, the correct answer is c. 16.47%.