Question

A stock has an expected return of 15.29 percent, the risk-free rate is 6.40 percent, and the market risk premium is 7.3 percent. Required: What must the beta of this stock be?

Answer 1

The beta of the stock must be 1.218.

Step-by-step explanation:

The beta of a stock is a measure of its volatility relative to the market as a whole. A beta of 1 means that the stock's price is expected to move in line with the market. A beta of more than 1 means that the stock's price is expected to be more volatile than the market, while a beta of less than 1 means that the stock's price is expected to be less volatile than the market.

In this case, the stock's expected return is 15.29 percent, which is higher than the risk-free rate of 6.40 percent. This means that the stock is expected to be more volatile than the market as a whole. Therefore, the stock's beta must be greater than 1.

To calculate the beta, we can use the following formula:

beta = (expected return - risk-free rate) / market risk premium

Plugging in the given values, we get:

beta = (0.1529 - 0.0640) / 0.073 = 1.218

Therefore, the beta of the stock must be 1.218.