Question

Assume that a security is fairly priced and has an expected rate of return of 0.17. The market expected rate of return is 0.11 and the risk-free rate is 0.04. The beta of the stock is ?

Answer 1

To determine the beta of a stock, the CAPM formula is used. With an expected return of 0.17, a risk-free rate of 0.04, and a market return of 0.11, the beta is calculated to be approximately 1.857, indicating higher than market volatility.

Step-by-step explanation:

To calculate the beta of a stock given an expected rate of return, market expected rate of return, and the risk-free rate, you can use the Capital Asset Pricing Model (CAPM). The CAPM formula is:

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

Based on the given information:

0.17 (Expected Rate of Return) = 0.04 (Risk-Free Rate) + (Beta * (0.11 - 0.04))

Now, we solve for Beta:

0.17 = 0.04 + (Beta * 0.07)

Beta = (0.17 - 0.04) / 0.07

Beta = 0.13 / 0.07

Beta ≈ 1.857

Thus, the beta of the stock is approximately 1.857, indicating that it is more volatile than the market.