A stock has a beta of 1.15, the expected return on the market (rm) is 10.3 percent, and the risk-free rate is 3.1 percent. What is rE for this stock? (Do not round intermediate calculations and do not enter your answer as a percent. Round your answer to 3 decimal places, e. g., 0.315 instead of 31.5%.)

Question

Business

Cassidy Riggs

6 June, 03:26

A stock has a beta of 1.15, the expected return on the market (rm) is 10.3 percent, and the risk-free rate is 3.1 percent. What is rE for this stock? (Do not round intermediate calculations and do not enter your answer as a percent. Round your answer to 3 decimal places, e. g., 0.315 instead of 31.5%.)

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Answers (1)

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Lawson Evans · Answer 1

0.114

Explanation:

In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below

Expected rate of return = Risk-free rate of return + Beta * (Market rate of return - Risk-free rate of return)

= 3.1% + 1.15 * (10.3% - 3.1%)

= 3.1% + 1.15 * 7.2%

= 3.1% + 8.28%

= 0.114

The (Market rate of return - Risk-free rate of return) is also known as market risk premium