Question

The beta of Ricci Co.'s stock is 3.2, whereas the risk-free rate of return is 9 percent. If the expected return on the market is 18 percent, then what should investors expect as a return on on Ricci Co.?

A) 28.80%
B) 37.80%
C) 48.60%
D) 57.60%

Answer 1

Using the CAPM formula, the expected rate of return for Ricci Co.'s stock is calculated to be 37.80%, corresponding to option B.

Step-by-step explanation:

The expected return on Ricci Co.'s stock can be calculated using the Capital Asset Pricing Model (CAPM), which is expressed as:

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

By plugging in the values given:

Expected Return = 9% + 3.2 * (18% - 9%)

Expected Return = 9% + 3.2 * 9%

Expected Return = 9% + 28.8%

Expected Return = 37.8%

Therefore, the expected rate of return on Ricci Co.'s stock for investors is 37.80%, which corresponds to option B.