The beta of Elsenore, Inc., stock is 1.6, whereas the risk-free rate of return is 8 percent. If the expected return on the market is 15 percent, then what should investors expect as a return on Elsenore?
A) 11.20%
B) 19.20%
C) 24.00%
D) 32.00%

Question

Quizplus · Accepted Answer

The expected return on Elsenore can be calculated using the Capital Asset Pricing Model (CAPM):

Expected return = Risk-free rate + Beta * (Expected market return - Risk-free rate)

= 8% + 1.6 * (15% - 8%)

= 8% + 11.2%

= 19.2%

Therefore, investors should expect a return of 19.2% on Elsenore, which is best represented by choice letter B.

The Beta of Elsenore, Inc