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21 November, 11:06

A stock has an expected return of 15.0 percent, its beta is 0.90, and the risk-free rate is 5.3 percent. What must the expected return on the market be

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  1. 21 November, 13:22
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    16.07%

    Explanation:

    The computation of the expected return on the market is shown below

    As we know that

    Expected Return on stock = Risk free return + beta (Expected Market Rate of Return - Risk free return)

    15 % = 5.3% + 0.90 * (Expected Market Rate of Return - 5.3%)

    15 % - 5.3% : 0.90 = Expected Market Rate of Return - 5.3%

    10.77% = Expected Market Rate of Return - 5.3 %

    So, expected market rate of return is

    = 10.77 + 5.3%

    = 16.07%

    We simply applied the above formula
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