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 is the expected return on Elsenore?
A) 11.20%
B) 19.20%
C) 24.00%
D) 32.00%

Question

Quizplus · Accepted Answer

The formula for calculating the expected return using the capital asset pricing model (CAPM) is:
Expected return = Risk-free rate + Beta × (Expected market return - Risk-free rate)

Plugging in the numbers, we get:
Expected return = 8% + 1.6 × (15% - 8%)
Expected return = 8% + 1.6 × 7%
Expected return = 8% + 11.2%
Expected return = 19.2%

Therefore, the expected return on Elsenore, Inc., stock is 19.2%. Option B is the correct choice.

The Beta of Elsenore, Inc