Answer to Question #114362 in Financial Math for dima hajj

Question

The risk-free rate of interest, rf, is 6 percent. The overall stock market has an expected return of 12 percent. Maro, Inc. has a beta of 1.2. What is the required return of Maro, Inc. stock?

Answer 1

1. According to CAPM, expected return of a particular stock, for example, Maro, Inc. can be calculated as:

$E(r) = rf+\beta*(E(rm)-rf)$

where $E(r)$ -expected return of a stock, $rf$ - risk-free rate, $\beta$ - beta, $E(rm)$ - expected return of the overall market.

2. By plugging in given values we get:

$E(r) = rf+\beta*(E(rm)-rf) =\\\\= 6+ 1.2*(12-6)=13.2$

Required return of Maro is 13.2%