Question

a stock with a beta of 2.1 has an expected rate of return of 32%. if the market return this year turns out to be 13 percentage points below expectations, what is your best guess as to the rate of return on the stock?

Answer 1

The best guess for the rate of return on the stock is -7.9%.

Step-by-step explanation:

The expected rate of return on a stock can be calculated using the formula:

Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)

In this case, the beta of the stock is 2.1 and the expected rate of return is 32%. If the market return is 13% below expectations, we can calculate the rate of return on the stock as follows:

Rate of Return on Stock = Risk-Free Rate + 2.1 * (Market Return - Risk-Free Rate)

Let x be the rate of return on the stock:

x = 0.32 + 2.1 * (0.13 - 0.32)

Simplifying the equation, we get:

x = 0.32 + 2.1 * (-0.19)

x = 0.32 - 0.399

x = -0.079

So, the best guess for the rate of return on the stock is -7.9%.