A stock has a beta of 1.22, the expected return on the market is 12 percent, and the risk- free rate is 4 percent. What must the expected return on this stock be? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Expected return
A stock has a beta of 1.22, the expected return on the market is 12 percent, and the risk- free rate is 4 percent. What must the expected return on this stock be? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Expected return
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
100%
14_13
![### Calculating the Expected Return on a Stock
A stock's expected return can be calculated using the Capital Asset Pricing Model (CAPM). The formula for CAPM is:
\[ \text{Expected Return} = R_f + \beta \times (R_m - R_f) \]
Where:
- \( R_f \) is the risk-free rate.
- \( \beta \) is the beta of the stock.
- \( R_m \) is the expected return of the market.
Given the following information:
- Beta (\( \beta \)) = 1.22
- Expected market return (\( R_m \)) = 12%
- Risk-free rate (\( R_f \)) = 4%
We can plug in the values into the CAPM formula:
\[ \text{Expected Return} = 4\% + 1.22 \times (12\% - 4\%) \]
### Prompt for User Input
Please calculate the expected return and enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).
**Expected return:** [ ] %
Note: Do not round intermediate calculations when performing the computation.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F4075dd7b-7cf0-4080-a9ab-c20ff4793850%2F2d2248bb-1b25-461c-a8ec-31aa2dc4ad40%2Feotxlmb_processed.jpeg&w=3840&q=75)
Transcribed Image Text:### Calculating the Expected Return on a Stock
A stock's expected return can be calculated using the Capital Asset Pricing Model (CAPM). The formula for CAPM is:
\[ \text{Expected Return} = R_f + \beta \times (R_m - R_f) \]
Where:
- \( R_f \) is the risk-free rate.
- \( \beta \) is the beta of the stock.
- \( R_m \) is the expected return of the market.
Given the following information:
- Beta (\( \beta \)) = 1.22
- Expected market return (\( R_m \)) = 12%
- Risk-free rate (\( R_f \)) = 4%
We can plug in the values into the CAPM formula:
\[ \text{Expected Return} = 4\% + 1.22 \times (12\% - 4\%) \]
### Prompt for User Input
Please calculate the expected return and enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).
**Expected return:** [ ] %
Note: Do not round intermediate calculations when performing the computation.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education