Question #114913

A stock has an expected return of 12.2 percent, the risk-free rate is 6 percent, and the market risk premium is 10 percent. What must the beta of this stock be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Expert's answer

Based on the capital asset pricing model the expected rate of return is computed using the following formula:

"\\text{Expected return=Risk free rate}+(\\text{Market return-Risk free rate})\\beta"

"(\\text{Market return-Risk free rate})" is the market risk premium.

Substituting the given information in the question to the above formula we get the equation to be:

"12.2\\%= 6\\%+10\\%\\times \\beta"

"\\beta=\\dfrac{12.2\\%-6\\%}{10\\%}"

"\\beta=0.62"

The beta of the stock must be **0.62**.

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