The risk-free rate is 5%,the beta of Stock A is 1.2,the beta of Stock B is 0.8,and the expected return on Stock A is 12.2%.What is the expected return on Stock B?
A) 8.4%
B) 9.2%
C) 9.8%
D) 11.0%
E) 12.2%

Question

Quizplus · Accepted Answer

Step 1 - Find the return on the market portfolio from data for Stock A: E(k_i) = k_F + β_i[E(k_M) - k_F] 0.0122 = 0.05 + 1.2[E(k_M) - 0.05] 0.072 = 1.2[E(k_M) - 0.05] 0.06 = E(k_M) - 0.05 E(k_M) = 0.11 or 11% Step 2 - Solve for expected return of Stock B: E(k_i) = 0.05 + 0.8 [0.11 - 0.05] E(k_i) = 0.05 + 0.088 - 0.04 E(k_i) = 0.05 + 0.048 = 0.098 or 9.8%

The Risk-Free Rate Is 5%,the Beta of Stock a Is