A stock with a beta of 0.9 has an expected rate of return of 10%. If the market return this year turns out to be 8 percentage points below expectations, what is your best guess as to the rate of return on the stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) Stock return %
A stock with a beta of 0.9 has an expected rate of return of 10%. If the market return this year turns out to be 8 percentage points below expectations, what is your best guess as to the rate of return on the stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) Stock 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
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Transcribed Image Text:A stock with a beta of 0.9 has an expected rate of return of 10%. If the market return this year turns out to be 8 percentage points
below expectations, what is your best guess as to the rate of return on the stock? (Do not round intermediate calculations. Enter
your answer as a percent rounded to 1 decimal place.)
Stock return
%
Expert Solution
Introduction
The question can be answered by determining the return for the stock using the capital asset pricing model (CAPM). The capital asset pricing model describes the relationship between the expected return and the risk associated with that investment. The expected return can be calculated based on the risk-free rate, the beta of the security, and the expected return of the market. The risk born by the investors signifies the compensation made to the investors in the form of a risk premium.
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