Question

A stock has an expected return of 12.2 percent, the risk-free rate is 6 percent, and the market risk premium is 10 percent. What must the beta of this stock be? (Do not round intermediate calculations and round your a

Answer 1

Beta = 0.62

Step-by-step explanation:

The capital pricing model establishes the relationship between expected return from a stock and its systematic risk . The systematic risk is that which affects all players (businesses and firms) in the entire market, such risks are occassioned by changes in interest rate, exchange rate e.t.c

According to the model , the expected return is computed as follows

E(r) = Rf + β(Rm-Rf)

Rf- risk -free rate, Rm-Rf - market premium

E(r) = 12.2%, Rm-Rf = 10, β- ?

12.2 = 6% + β× 10

10β = 12.2 -6

β= (12.2-6)/10

= 0.62