Question

The stock of rullo rigs has a beta of 1.34. the risk-free rate of return is 1.9 percent, the inflation rate is 2.2 percent, and the market risk premium is 6.9 percent. what is the expected rate of return on this stock?

O 2.8%
O 8.8%
O 11.1%
O 9.4%
O 8.6%

Answer 1

To find the expected rate of return for Rullo Rigs stock, we use the Capital Asset Pricing Model. The calculation with a risk-free rate of 1.9%, a beta of 1.34, and a market risk premium of 6.9% results in an expected return of approximately 11.1%. Therefore correct option is C

Step-by-step explanation:

The student has asked for the calculation of the expected rate of return on the stock of Rullo Rigs. To find this, we use the Capital Asset Pricing Model (CAPM), which calculates the expected return of an asset based on its risk, the risk-free rate of return, and the market risk premium. In this case, the CAPM formula is represented as: Expected Return = Risk-Free Rate + (Beta * Market Risk Premium).

Using the provided figures, we have:

Risk-Free Rate = 1.9%
Beta (β) = 1.34
Market Risk Premium = 6.9%

The calculation is therefore: Expected Return = 1.9% + (1.34 * 6.9%). We perform the multiplication first which gives us 9.246%, and then we add the risk-free rate to get the final result. Therefore, the expected rate of return for Rullo Rigs stock is 1.9% + 9.246% = 11.146%, which rounds to approximately 11.1%.