A stock has a beta of 1.04, the expected return on the market is 11.75, and the risk-free rate is 3.75.What must the expected return on this stock be?
A)9.89 percent
B)38.32 percent
C)13.56 percent
D)19.16 percent
E)12.07 percent

Question

A stock has a beta of 1.04, the expected return on the market is 11.75, and the risk-free rate is 3.75.What must the expected return on this stock be?
A)9.89 percent 
B)38.32 percent
C)13.56 percent
D)19.16 percent
E)12.07 percent

Quizplus · Accepted Answer

The expected return on the stock can be calculated using the Capital Asset Pricing Model (CAPM): Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Plugging in the values: 3.75 + 1.04 * (11.75 - 3.75) = 12.07 percent.

A Stock Has a Beta of 1