Question

the stock of big joe's has a beta of 1.62 and an expected return of 13.20 percent. the risk-free rate of return is 5.7 percent. what is the expected return on the market?

Answer 1

By using the CAPM formula and the given values for the expected return on Big Joe's stock, its beta, and the risk-free rate, we find that the expected return on the market is approximately 10.02%.

Step-by-step explanation:

The question pertains to determining the expected return on the market given the beta of stock, the expected return of that stock, and the risk-free rate of return. According to the Capital Asset Pricing Model (CAPM), the expected return on a stock is equal to the risk-free rate plus the product of the stock's beta and the market risk premium (the expected return of the market minus the risk-free rate).

The formula for CAPM is as follows:

Expected Return on Stock = Risk-free Rate + Beta * (Expected Return on Market - Risk-free Rate)

Given that the expected return on Big Joe's stock is 13.20%, beta is 1.62, and the risk-free rate is 5.7%, we can rearrange the CAPM formula to solve for the expected return on the market:

13.20% = 5.7% + 1.62 * (Expected Return on Market - 5.7%)

After solving this equation, we calculate that the expected return on the market is approximately 10.02%.