Question

The risk-free rate is 1.98% and the market risk premium is 6.90%. A stock with a β of 0.93 will have an expected return of ____%.

Answer 1

To calculate the expected return of a stock using the Capital Asset Pricing Model (CAPM), you can use the following formula:

\[
\text{Expected Return} = \text{Risk-Free Rate} + \beta \times (\text{Market Risk Premium})
\]

Given:
- Risk-Free Rate = 1.98%
- Market Risk Premium = 6.90%
- β (beta) = 0.93

Now, substitute the values into the equation:

\[
\text{Expected Return} = 1.98\% + 0.93 \times 6.90\%
\]

First, calculate the product of \(\beta\) and the Market Risk Premium:

\[
0.93 \times 6.90\% = 6.417\%
\]

Now, add this to the Risk-Free Rate:

\[
\text{Expected Return} = 1.98\% + 6.417\% = 8.397\%
\]

Therefore, the expected return of the stock is approximately **8.40%**.