Question

a stock has an expected return of 11.2 percent, the risk-free rate is 3 percent, and the market risk premium is 5 percent. what must the beta of this stock be? (do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

To determine the beta of the stock, we can use the Capital Asset Pricing Model (CAPM) equation:

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

Let's assign the given values to the variables:

Expected Return = 11.2%

Risk-Free Rate = 3%

Market Risk Premium = 5%

We can rearrange the formula to solve for beta:

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

Substituting the values into the equation:

Beta = (11.2% - 3%) / 5%

Calculating the expression:

Beta = 8.2% / 5%

Beta = 1.64

Therefore, rounding to two decimal places, the beta of this stock must be 1.64.