Question

A stock has a beta of 1.08, the expected return on the market is 10.2 percent, and the risk-free rate is 4.85 percent.

Required: What must the expected return on this stock be? (Do not include the percent sign (%).Round your answer to 2 decimal places (e.g., 32.16).)
Expected return ____________%?

Answer 1

The expected return on the stock can be calculated using the CAPM formula. In this case, the expected return is 9.33%.

Step-by-step explanation:

To calculate the expected return on the stock, we can use the Capital Asset Pricing Model (CAPM) formula:

Expected Return = Risk-Free Rate + Beta * (Expected Market Return - Risk-Free Rate)

Given that the beta of the stock is 1.08, the expected return on the market is 10.2 percent, and the risk-free rate is 4.85 percent, we can substitute these values into the formula:

Expected Return = 4.85% + 1.08 * (10.2% - 4.85%) = 9.33%

Therefore, the expected return on this stock is 9.33%.