Question

You are analyzing a stock that has a beta of 1.28. The​ risk-free rate is 4.5 % and you estimate the market risk premium to be 7.7 %. If you expect the stock to have a return of 9.6 % over the next​ year, should you buy​ it? Why or why​ not?

Answer 1

No. Don't invest in the stock.

Step-by-step explanation:

First of all we have to calculate the return that we should expect from a company having beta of 1.28. To do so, CAPM should be used.

Ke = Risk-Free Rate + Beta (Market Risk Premium)

Putting values:

⇒ The Expected Return is = .045 + 1.28 (.077) = .14356 = 14.356%.

You are expecting the stock to generate a return of 9.6% but your analysis indicates that you should expect and demand a return of 14.35% from a stock having beta of 1.28. So, you should not but it.

Thanks!