Question

The risk-free rate of return is 5.4 percent and the market risk premium is 13 percent. What is the expected rate of return on a stock with a beta of 1.6?

26.20 percent
13.10 percent
21.64 percent
20.80 percent
10.82 percent

Answer 1

To find the expected rate of return on a stock with a beta of 1.6 when the risk-free rate is 5.4 percent and the market risk premium is 13 percent, we use the CAPM formula, which results in an expected rate of return of 26.20 percent.

Step-by-step explanation:

The question asks about calculating the expected rate of return on a stock using the Capital Asset Pricing Model (CAPM), which is given by the formula:

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

Given that the risk-free rate of return is 5.4 percent and the market risk premium is 13 percent, for a stock with a beta of 1.6, the calculation is as follows:

Expected Rate of Return = 5.4% + (1.6 * 13%) = 5.4% + 20.8% = 26.20 percent.