The return on treasury notes is expected to be 10%.The expected return on the market is 14%.What is the expected return on a stock with a beta of - 0.5?
A)8%
B)- 7%
C)0%
D)No stock can have a negative beta.

Question

Quizplus · Accepted Answer

The expected return on a stock can be calculated using the Capital Asset Pricing Model (CAPM), which is given by the formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Here, the risk-free rate is the return on treasury notes (10%), the market return is 14%, and the beta is -0.5. Plugging these values into the formula gives: Expected Return = 10% + (-0.5) * (14% - 10%) = 10% - 2% = 8%.

The Return on Treasury Notes Is Expected to Be 10