Question

Given a risk-free rate of 2%, a market risk premium of 15.8%, and a beta of 0.97, what is the expected return of the stock? Enter your answer as a percentage and rounded to 2 DECIMAL PLACES. Do not put the percent sign in your answer.

Answer 1

To find the expected return of the stock, we use the CAPM formula, substituting the provided risk-free rate, market risk premium, and beta. After calculation, the expected return is 17.33.

Step-by-step explanation:

To calculate the expected return of a stock, we can apply the Capital Asset Pricing Model (CAPM). This model helps investors understand the relationship between the risk of an asset and the expected return. The formula we use is:

Expected return of the stock = Risk-Free Rate + (Beta * Market Risk Premium)

Given the information:

• Risk-Free Rate = 2%
• Market Risk Premium = 15.8%
• Beta = 0.97

We can substitute these values into the formula:

Expected return of the stock = 2% + (0.97 * 15.8%)

Expected return of the stock = 2% + (15.326%)

Expected return of the stock = 17.326%

Round this to two decimal places for the final answer:

17.33

The correct option for the expected return, rounded to two decimal places and without the percent sign, is 17.33.