Question

Investors expect the market rate of return this year to be 15.00%. The expected rate of return on a stock with a beta of 1.3 is currently 19.50%. If the market return this year turns out to be 12.80%, how would you revise your expectation of the rate of return on the stock? (Do not round intermediate calculations. Round your answer to 1 decimal place.)

Answer 1

Expectation of rate of return on the stock is 16.64%

Step-by-step explanation:

Ke=Rf+beta(Mrp-Rf)

Rf is unknown

Mrp is 15%

Ke is 19.5%

beta is 1.3

19.5%=Rf+1.3(15%-Rf)

19.5%=Rf+19.5%-1.3Rf

19-5%-19.5%=Rf-1.3Rf

0%=-0.3Rf

Rf=0%/-0.3

Rf=0%

By substituting the value of Rf in the original formula ,we can now calculate Ke when Mrp is 12.80%,beta is 1.3 Rf is 0%

Ke=0%+1.3(12.80%-0%)

Ke=0%+16.64%+0%

Ke=16.64%