Question

What is the expected rate of return on a stock that has a beta of 1.59 if the market risk premium is 9.1 percent and the risk-free rate is 4.4 percent?

A) 18.87 percent
B) 14.86 percent
C) 17.01 percent
D) 17.94 percent

Answer 1

The expected rate of return on a stock with a beta of 1.59 can be calculated using the formula: Expected Return = Risk-Free Rate + Beta * Market Risk Premium. The correct answer is A) 18.87 percent.

Step-by-step explanation:

To calculate the expected rate of return on a stock, we use the formula:

Expected Return = Risk-Free Rate + Beta * Market Risk Premium

Given that the stock has a beta of 1.59, a market risk premium of 9.1 percent, and a risk-free rate of 4.4 percent, we can calculate the expected rate of return as follows:

Expected Return = 4.4% + 1.59 * 9.1% = 4.4% + 14.489% = 18.889%

Therefore, the expected rate of return on the stock with a beta of 1.59 is approximately 18.887%. So the correct answer is A) 18.87 percent.