Question

What is the expected rate of return of a security with a beta of 2.1?

1) 0.13
2) 2.1
3) Cannot be determined
4) Not enough information provided

Answer 1

Without sufficient information such as the risk-free rate and the market rate of return, the expected rate of return on a security with a beta of 2.1 cannot be determined; therefore, the correct choice is 4) Not enough information provided.

Step-by-step explanation:

The question of determining the expected rate of return for a security with a given beta cannot be answered with the information provided. The expected rate of return on a security in the market is typically estimated using the Capital Asset Pricing Model (CAPM), which takes into account the risk-free rate, the market rate of return, and the security's beta. The formula is:

Expected return = Risk-free rate + Beta x (Market return - Risk-free rate)

Without the risk-free rate and market rate of return, we cannot calculate the expected return, so the correct answer is 4) Not enough information provided.