Suppose you forecast that the market index will earn a return of 15% in the coming year. Treasury bills are yielding 6%. The unadjusted β of Mobil stock is 1.30. A reasonable forecast of the return on Mobil stock for the coming year is _________ if you use a common method to derive adjusted betas.
A) 15.0%
B) 15.5%
C) 16.0%
D) 16.8%

Question

Quizplus · Accepted Answer

Adjusted beta = 2/3(1.3) + 1/3 = 1.20; E(r_M) = 6% + 1.20(9%) = 16.8%.

Suppose You Forecast That the Market Index Will Earn a Return