Suppose the MiniCD Corporation's common stock has a return of 12%. Assume the risk-free rate is 4%, the expected market return is 9%, and no unsystematic influence affected Mini's return. The beta for MiniCD is:
A) 0.89.
B) 1.60.
C) 2.40.
D) 3.00.

Question

Quizplus · Accepted Answer

The beta ($\beta$) of a stock can be calculated using the Capital Asset Pricing Model (CAPM) formula, which is: $$ \text{Expected Return} = \text{Risk-Free Rate} + \beta(\text{Market Return} - \text{Risk-Free Rate}) $$ Given that the expected return for MiniCD Corporation's common stock is 12%, the risk-free rate is 4%, and the expected market return is 9%, we can rearrange the formula to solve for $\beta$: $$ 12\% = 4\% + \beta(9\% - 4\%) $$ Simplifying, we get: $$ 8\% = \beta(5\%) $$ Therefore, $\beta = \frac{8\%}{5\%} = 1.60$.

Suppose the MiniCD Corporation's Common Stock Has a Return of 12