Question

The common stock of Flavorful Teas has an expected return of 13.37 percent. The return on the market is 12.5 percent and the risk-free rate of return is 3.8 percent. What is the beta of this stock?

2.50
0.55
0.91
0.98
1.10

Answer 1

To calculate the beta of Flavorful Teas' stock, the Capital Asset Pricing Model (CAPM) is used. With the given expected return, market return, and risk-free rate, the beta is calculated to be 1.10.

Step-by-step explanation:

To find the beta of Flavorful Teas' stock, we can use the Capital Asset Pricing Model (CAPM), which describes the relationship between systematic risk and expected return for assets. The formula for CAPM is:

Expected return = Risk-free rate + Beta * ( Market return - Risk-free rate )

Given that the expected return on Flavorful Teas is 13.37%, the return on the market is 12.5%, and the risk-free rate is 3.8%, we can set up the following equation:

13.37% = 3.8% + Beta * (12.5% - 3.8%)

By simplifying the equation and solving for Beta, we find that:

Beta = (13.37% - 3.8%) / (12.5% - 3.8%)
Beta = 9.57% / 8.7%
Beta = 1.10

Therefore, the beta of Flavorful Teas' stock is 1.10.