Question

The beta of Ricci Co.'s stock is 3.2, whereas the risk-free rate of return is 9 percent. If the expected return on the market is 18 percent, then what should investors expect as a return on on Ricci Co.?

Answer 1

Investors expect a return of 37.80 %.

Step-by-step explanation:

The return that investors expect is the cost of equity to Ricci Co.

Cost of Equity = Return on Risk Free Security + Beta × Risk Premium

Where,

Risk Premium = Return on Market Portfolio - Return on Risk Free Security

= 18.00% - 9.00%

= 9.00 %

Cost of Equity = 9.00% + 3.2 × 9.00 %

= 37.80 %