Investors expect the market rate of return this year to be 12.50%. The expected

Question

Investors expect the market rate of return this year to be 12.50%. The expected rate of return on a stock with a beta of 0.9 is currently 11.25%. If the market return this year turns out to be 9.70%, how would you revise your expectation of the rate of return on the stock? (Round your answer to 1 decimal place.)

*PLEASE EXPLAIN HOW TO DO PROBLEM*

Investors expect the market rate of return this year to be 12.50%. The expected rate of return on a stock with a beta of 0.9 is currently 11.25%. If the market return this year turns out to be 9.70%, how would you revise your expectation of the rate of return on the stock? (Round your answer to 1 decimal place.)

*PLEASE EXPLAIN HOW TO DO PROBLEM*

Explanation / Answer

Expected return = risk free + beta*(market return-risk free)

11.25% = risk free + 0.9*(12.5%-risk free)

risk free = 0%

Revised return = 0% +0.9*(9.7%-0) = 8.7%

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