Suppose the risk free rate is 5

Finance Apr 19, 2021

Suppose the risk free rate is 5.9% and the expected rate of return to the market is 10.2%. If the stock xyz's beta is 1.1, what is the expected rate of return to the stock?

Expert Solution

Computation of Expected Return to the Stock using CAPM:

Expected Return on Stock = Risk-free Rate + Beta*Market Risk Premium

Here,

Market Risk Premium = Expected Return on Market - Risk-free Rate = 10.2% - 5.9% = 4.30%

Expected Return on Stock = 5.9% + 1.1 * 4.30% = 10.63%

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