Question

The common stock of Flavorful Teas has an expected return of 17.96 percent. The return on the market is 14 percent and the risk-free rate of return is 4.1 percent. What is the beta of this stock

Answer 1

Beta= 1.4

Step-by-step explanation:

The Capital Asset pricing Model (CAPM) can be used to determined the beta. According to the Capital Asset pricing Model the return on equity is dependent on the level of reaction of the the equity to changes in the return on a market portfolio. These changes are captured as systematic risk. The magnitude by which a stock is affected by systematic risk is measured by beta.

Under CAPM, Ke= Rf + β(Rm-Rf)

Rf-risk-free rate (treasury bill rate), β= Beta, Rm= Return on market.

Using this model,

17.96%= 4.1% + β× (14% - 4.1%)

β× (9.9 %)= 17.96% - 4.1%= 13.86%

β× (9.9 %)= 13.86%

β= 1.4

Beta= 1.4