We know the following expected returns for stock A and the market portfolio, given different states of the economy: State (s) Probability E(rA,s) E(rM,s) Recession 0.3 -0.05 0.02 Normal 0.5 0.1 0.05 Expansion 0.2 0.18 0.09 The risk-free rate is 0.02. Assuming the CAPM holds (expected and required returns are the same) , what is the beta for stock A?
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
We know the following expected returns for stock A and the market portfolio, given different states of the economy:
| State (s) | Probability | E(rA,s) | E(rM,s) |
| Recession | 0.3 | -0.05 | 0.02 |
| Normal | 0.5 | 0.1 | 0.05 |
| Expansion | 0.2 | 0.18 | 0.09 |
The risk-free rate is 0.02.
Assuming the CAPM holds (expected and required returns are the same) , what is the beta for stock A?
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