A stock has a beta of 1.04, the expected return on the market is 10 percent, and

Question

A stock has a beta of 1.04, the expected return on the market is 10 percent, and the risk-free rate is 3.5 percent. What must the expected return on this stock be? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

A stock has a beta of 1.04, the expected return on the market is 10 percent, and the risk-free rate is 3.5 percent. What must the expected return on this stock be? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Answer:

Calculation of Expected return using CAPM model formula:

Expected Return = Risk Free rate + Beta * (Return on market - Risk Free rate )

Hence,

Expected Return = 3.5 + 1.04*(10-3.5) = 10.26%

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