Question

Consider the CAPM. The risk-free rate is 5%, and the expected return on the market is 15%. What is the beta on a stock with an expected return of 17%

Answer 1

To find the beta of a stock with an expected return of 17%, given a risk-free rate of 5% and a market return of 15%, we use the CAPM formula. The beta is calculated to be 1.2, indicating that the stock is more volatile than the overall market.

Step-by-step explanation:

The student's question involves calculating the beta of a stock using the Capital Asset Pricing Model (CAPM), given the risk-free rate, the expected return on the market, and the expected return on the stock. The CAPM formula is:

Expected Return on the Stock (Ri) = Risk-Free Rate (Rf) + Beta (β) * (Expected Return on the Market (Rm) - Risk-Free Rate (Rf))

To find the beta for the stock, we rearrange the formula:

Beta (β) = (Ri - Rf) / (Rm - Rf)

Inserting the given values, we get:

Beta (β) = (0.17 - 0.05) / (0.15 - 0.05)

Beta (β) = 0.12 / 0.10

Beta (β) = 1.2

Therefore, the beta for the stock with an expected return of 17% is 1.2. This implies that the stock is more volatile than the market since its beta is greater than 1.