You own a stock that has an expected return of 16.48 percent and a beta of 1.33. The U.S. Treasury bill is yielding 3.65 percent and the inflation rate is 2.95 percent. What is the expected rate of return on the market?
A) 13.07 percent
B) 13.30 percent
C) 13.64 percent
D) 14.09 percent
E) 14.42 percent

Question

Quizplus · Accepted Answer

The formula for calculating the expected rate of return on a stock is:

expected return = risk-free rate + beta * (expected market return - risk-free rate)

Substituting the given values, we get:

16.48% = 3.65% + 1.33 * (expected market return - 3.65%)

Solving for the expected market return, we get:

Expected market return = (16.48% - 3.65%) / 1.33 + 3.65%
= 13.30%

Therefore, the expected rate of return on the market is 13.30%.

Option B is the correct answer as it matches with the calculated expected rate of return on the market.

You Own a Stock That Has an Expected Return of 16.48