Consider the capm. The risk-free rate is 6%, and the expected return on the market is 18%. What is the expected return on a stock with a beta of 1. 3?.

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27-10-2022
Business

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Consider the capm. The risk-free rate is 6%, and the expected return on the market is 18%. What is the expected return on a stock with a beta of 1. 3?.

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qwoffwhite qwoffwhite · Answer 1 · 2022-11-06T16:15:09-05:00

21.6% is the expected return on a stock with a beta of 1. 3.

A theoretically reasonable required rate of return on an asset is determined using the CAPM, a model used in finance. The amount of profit or loss an investor might expect to experience as a result of an investment is known as the "Expected return."

When calculating an expected return, potential outcomes are multiplied by the likelihood that they will occur before being added together. Here, we have to find the expected return of stock which can be calculated as,

E([tex]R_{a}[/tex]) = [tex]R_{f}[/tex] [tex]+\beta (R_{m} -R_{f})[/tex]

Here E([tex]R_{a}[/tex]) is the expected return of stock which we have to find.

[tex]R_{f}[/tex] is the Risk-free rate,

[tex]R_{f}[/tex] = 6%

The expected return on the market is given by [tex]R_{m}[/tex],

[tex]R_{m}[/tex] = 18%

[tex]\beta[/tex] is the Beta value of the stock,

[tex]\beta[/tex] = 1.3

For calculating the expected return of the stock, put the values in the above formula. Therefore,

E([tex]R_{a}[/tex]) = 6% + [18% - 6%](1.3)

=6% + ( 12%) (1.3)

=21.6

So, with a beta of 1.3, the stock's expected return is calculated as 21.6%.

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