Question

A stock has an expected return of 12.2 percent, the risk-free rate is 6 percent, and the market risk premium is 10 percent. What must the beta of this stock be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Based on the capital asset pricing model the expected rate of return is computed using the following formula:

$\text{Expected return=Risk free rate}+(\text{Market return-Risk free rate})\beta$

$(\text{Market return-Risk free rate})$ is the market risk premium.

Substituting the given information in the question to the above formula we get the equation to be:

$12.2\%= 6\%+10\%\times \beta$

$\beta=\dfrac{12.2\%-6\%}{10\%}$

$\beta=0.62$

The beta of the stock must be 0.62.