Question

The risk-free rate of return is currently 3 percent, whereas the market risk premium is 6 percent. If the beta of Lenz, Inc., stock is 1.8, then what is the expected return on Lenz?

A) 8.40%
B) 10.80%
C) 13.80%
D) 19.20%

Answer 1

The expected return on Lenz, Inc. stock is calculated using the CAPM formula, resulting in a 13.8% expected return. Therefore, the correct answer is C) 13.80%.

Step-by-step explanation:

The expected return on Lenz, Inc. stock, given its beta of 1.8, risk-free rate of 3%, and market risk premium of 6%, can be calculated using the Capital Asset Pricing Model (CAPM). The formula for CAPM is:

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

Substituting the given values we get:

Expected Return = 3% + (1.8 × 6%)

So, Expected Return = 3% + 10.8% = 13.8%

Hence, the correct answer is C) 13.80%.