The common stock of New Firm has an expected return of 16

Finance Dec 23, 2020

The common stock of New Firm has an expected return of 16.74 percent. The risk-free rate is 4 percent and the market risk premium is 9 percent. What is the beta of New Firm stock?

Expert Solution

Beta of New Firm stock using CAPM formula:

E(r) = RFR + $\beta$ * Market risk premium

Given;

E(r) = Expected return = 16.74%

RFR = Risk-free rate = 4%

$\beta$ = Beta for stock

Market risk premium = 9%

16.74% = 4% + $\beta$ * 9%

(16.74% - 4%) / 9% = $\beta$

$\beta$ = 1.41555556

Beta of New Firm stock is 1.41555556

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