Question

Consider a stock with required return of 10.99%. if the market return is 8.21% and the risk-free rate is 1.14%, what is the stock's beta according to the capital asset pricing model?

Answer 1

To find the stock's beta using the CAPM, we use the given required return, market return, and risk-free rate. Then, rearrange the CAPM formula to find beta, which in this case is approximately 1.393.

Step-by-step explanation:

The question asks us to calculate the beta of a stock using the Capital Asset Pricing Model (CAPM). The CAPM formula is expressed as:

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

Here, the required return on the stock is given as 10.99%, the market return is 8.21%, and the risk-free rate is 1.14%. By rearranging the CAPM formula to solve for Beta, we get:

Beta = (Required Return - Risk-Free Rate) / (Market Return - Risk-Free Rate)

Substituting the given values into the formula:

Beta = (10.99% - 1.14%) / (8.21% - 1.14%)

Beta = 9.85% / 7.07% = 1.393

Therefore, the stock's beta is approximately 1.393 according to the CAPM.