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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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  1. 6 June, 04:30
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    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
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