Question

A stock has an expected return of 12.6 percent, the risk-free rate is 7 percent, and the market risk premium is 10 percent. What must the beta of this stock be

Answer 1

0.56

Step-by-step explanation:

In this question we used the Capital Asset Pricing Model formula i.e shown below:

As we know that

Expected rate of return = Risk free rate of return + Beta × market risk premium

12.6% = 7% + Beta × 10%

12.6% - 7% = Beta × 10%

5.6% = Beta × 10%

So, the beta is

= 5.6% ÷ 10%

= 0.56

Hence, the beta of the stock is 0.56