Question

You are thinking of buying a stock priced at $ 96 per share. Assume that the​ risk-free rate is about 4.1 % and the market risk premium is 6.6 %. If you think the stock will rise to $ 117 per share by the end of the​ year, at which time it will pay a $ 1.13 ​dividend, what beta would it need to have for this expectation to be consistent with the​ CAPM?

Answer 1

Answer: 3.35

Step-by-step explanation:

Before we use the Capital Asset Pricing Model we will first have to find the Expected Return using the figures given.

We can do that using the following formula,

Expected return = (End value - Beginning value+Dividend)/Beginning value

Expected return = (117 - 96 + 1.13)/ 96

= 23.05%

Now we can use the CAPM to find the beta.

The formula goes like,

Expected rate = Risk free rate + Beta (market risk premium)

Making beta the subject we have,

Beta (market risk premium) = Expected Rate - Risk free rate

Beta = (Expected Rate - Risk free rate) / Market risk premium

Beta = (23.05% - 4.1%)/6.6%

Beta = 3.34923484848

Beta = 3.35