Question

The risk-free rate of return is 4.2 percent and the market risk premium is 11 percent. What is the expected rate of return on a stock with a beta of 1.8

Answer 1

r = 0.24 or 24%

Step-by-step explanation:

The expected rate of return or the required rate of return is the minimum return that investors anticipate on a stock based on the systematic risk of that stock as measured by its beta. The CAPM equation can be used to calculate the expected rate of return on a stock. The formula is,

r = rRF + Beta * rpM

Where,

• rRF is the risk free rate
• rpM is the risk premium on market

r = 0.042 + 1.8 * 0.11

r = 0.24 or 24%