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%.