The risk-free rate is 3.4 % and you believe that the S&P 500's excess return will be 11.9 % over the next year. If you invest in a stock with a beta of 1 (and a standard deviation of 30 %), what is your best guess as to its expected excess return over the next year?

Question

Business

Hernandez

5 June, 19:12

The risk-free rate is 3.4 % and you believe that the S&P 500's excess return will be 11.9 % over the next year. If you invest in a stock with a beta of 1 (and a standard deviation of 30 %), what is your best guess as to its expected excess return over the next year?

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Answers (1)

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Zain Glenn · Answer 1

So since our Risk was "1.2 times" to the Risk of Market Hence Out Expected Return would also be 1.2 times.

Explanation:

Before Answering the Question, let us Understand some Important terms in simple language:

Market Excess Reture : it is basically that how much Market Return will be "Over & Above" Riskfree Rate

Beta : it shows that How much times is Risk of Our Stock in Comparison to that of Market. So We would be Expecting "that much times" Excess Return from that of "Market Excess Return"

? Now in Our Question it is Given that

Expected Excess Market Return (Rm - Rf) over next year = 11.9%

Beta of pur Stock = 1.2

/therefore Our Expected Excess Return over next year = Beta * Expected Excess Market Return

= 1.2 * 11.9%

= 14.28 %