Suppose you forecast that the market index will earn a return of 12% in the coming year.Treasury bills are yielding 4%.The unadjusted $\beta$of Mobil stock is 1.50.A reasonable forecast of the return on Mobil stock for the coming year is _________ if you use a common method to derive adjusted betas.
A)15.0%
B)15.5%
C)16.0%
D)14.7%

Question

Quizplus · Accepted Answer

The adjusted beta is often calculated using the formula: Adjusted Beta = (2/3) * Unadjusted Beta + (1/3) * 1. Using the unadjusted beta of 1.50 for Mobil stock, the adjusted beta would be (2/3)*1.50 + (1/3)*1 = 1.33. The expected return using the Capital Asset Pricing Model (CAPM) is: Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Substituting the given values: 4% + 1.33 * (12% - 4%) = 4% + 1.33 * 8% = 4% + 10.64% = 14.64%, which rounds to 14.7%.

Suppose You Forecast That the Market Index Will Earn a Return