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 is the expected return on Ricci Co.?
A) 28.80%
B) 37.80%
C) 48.60%
D) 57.60%

Question

Quizplus · Accepted Answer

The expected return on Ricci Co. can be calculated using the Capital Asset Pricing Model (CAPM):
Expected Return on Ricci Co. = Risk-Free Rate + Beta * (Expected Return on Market - Risk-Free Rate)
Expected Return on Ricci Co. = 9% + 3.2 * (18% - 9%)
Expected Return on Ricci Co. = 9% + 28.8%
Expected Return on Ricci Co. = 37.8% 
Therefore, the best choice is B, as it is the only option that matches the calculated expected return.

The Beta of Ricci Co