Question

Investors expect the market rate of return this year to be 11.50%. The expected rate of return on a stock with a beta of 0.8 is currently 9.20%. If the market return this year turns out to be 8.10%, 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

6.48%

Step-by-step explanation:

For computing the revised expected return first we have to find out the expected return which is shown below:

Expected return = Beta × Market rate of return

= 0.8 × 0.115

= 0.092 or 9.2%

Now the required expected rate of return if market return changed to 8.10%

Revised Expected return = 0.8 × 0.081

= 6.48%