Question

A stock has an expected return of 13 percent, the risk-free rate is 4.1 percent, and the market risk premium is 5.3 percent. What is the stock's beta?

Answer 1

Stock Beta = 1.68

Step-by-step explanation:

The expected return on stock can be estimate using te capital asset pricing model (CAPM).

The capital pricing model establishes the relationship between expected return from a stock and its systematic risk . The systematic risk is that which affects all players (businesses and firms) in the entire market, such risks are occasioned by changes in interest rate, exchange rate e.t.c

According to the model , the expected return is computed as follows

E(r) = Rf + β(Rm-Rf)

Rf- risk -free rate, Rm-Rf - market premium , β- beta

DATA:

E(r) = 13%, Rm-Rf = 5.3 , risk-free rate- 4.1%, β?

Applying this model, we have

13% = 4.1% + β× (5.3%)

0.13 = 0.041 + 0.053β

Collecting like terms

0.053β= 0.13 - 0.041

divide both sides by 0.053

β= (0.13 - 0.041)/0.053

β = 1.679

Stock Beta = 1.68