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

Answer 1

beta = 1.64

Step-by-step explanation:

in order to calculate beta, we can use the cost of equity formula:, but instead of cost of equity we can use expected return:

expected return = risk free rate + (beta x market risk premium)

11.2% = 3% + (beta x 5%)

beta x 5% = 11.2% - 3% = 8.2%

beta = 8.2% / 5% = 1.64

in order to calculate beta, we can use the cost of equity formula: