Question

A stock has a required return of 13%; the risk-free rate is 5.5%; and the market risk premium is 4%. What is the stock's beta

Answer 1

1.875

Step-by-step explanation:

We can use the Capital Asset Pricing Model (CAPM) to find the beta of the stock as follows :

Stock`s Return = Rf + Beta × (Rm - Rf)

Where,

Rf is Expected Return on Risk Free Securities

(Rm - Rf) is stocks` risk premium

Therefore,

Beta = (Stock`s Return - Rf) ÷ (Rm - Rf)

= ( 13% - 5.5%) ÷ 4%

= 1.875

Conclusion

The Stocks` Beta is 1.875