The beta of Ricci Co.'s stock is 3.2, whereas the risk-free rate of return is 9 percent. If the expected return on the market is 18 percent, then what should investors expect as a return on on Ricci Co.?
A) 28.80%
B) 37.80%
C) 48.60%
D) 57.60%

Question

Quizplus · Accepted Answer

Using the Capital Asset Pricing Model (CAPM), the expected return on Ricci Co.'s stock can be calculated as:

Expected Return = Risk-Free Rate + Beta * (Expected Market Return - Risk-Free Rate)
Expected Return = 9% + 3.2 * (18% - 9%)
Expected Return = 9% + 3.2 * 9%
Expected Return = 9% + 28.8%
Expected Return = 37.8%

Therefore, the expected return on Ricci Co.'s stock is 37.8%, which is closest to option B (37.80%).

The Beta of Ricci Co