Question

Bama Entertainment has common stock with a beta of 1.22. The market risk premium is 8.1 percent and the risk-free rate is 3.9 percent. What is the expected return on this stock?

A. 13.31 percent
B. 12.67 percent
C. 12.40 percent
D. 13.78 percent
E. 14.13 percent

Answer 1

The expected return on Bama Entertainment's common stock is calculated using the Capital Asset Pricing Model (CAPM) to be 13.782%, making option D (13.78 percent) the correct answer.

Step-by-step explanation:

The expected return on Bama Entertainment's common stock is calculated using the Capital Asset Pricing Model (CAPM) to be 13.782%, making option D (13.78 percent) the correct answer.

Step-by-step explanation:

The expected return on Bama Entertainment's common stock can be calculated using the Capital Asset Pricing Model (CAPM), which is defined as:

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

By plugging in the given values:

Risk-Free Rate = 3.9%

Beta = 1.22

Market Risk Premium = 8.1%

We get:

Expected Return = 3.9% + (1.22 × 8.1%)

= 3.9% + 9.882%

= 13.782%

Therefore, the correct option is D. 13.78 percent. This is the expected return on this stock, and it incorporates the time value of money with the risk premium relevant to the stock's volatility compared to the market.