Thayer Farms stock has a beta of 1.38. The risk-free rate of return is 3.87 percent, the inflation rate is 3.93 percent, and the expected market return is 9.03 percent. What is the expected rate of return on this stock?

Expected rate of return on stock = 10.99%

Explanation:

The expected rate of return E (r) can be determined using the capital assets pricing model (CAPM)

The CAPM is expressed below:

Under CAPM,

E (r) = Rf + β (Rm-Rf)

Rf-risk-free rate (treasury bill rate), β = Beta, Rm = Return on market.

Using this model,

Rf - 3.87%, β - 1.38, Rm - 9.03%

Ke = 3.87% + 1.38 * (9.03-3.87) %

= 10.9908

Expected rate of return on stock = 10.99%