Risk Metrics Company is expected to pay a dividend of $3.50 in the coming year. Dividends are expected to grow at a rate of 10% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock is trading in the market today at a price of $90.00. What is the approximate beta of Risk Metrics's stock?
A) 0.8
B) 1.0
C) 1.1
D) 1.4
E) None of the options are correct.

Question

Quizplus · Accepted Answer

The expected return using the Gordon Growth Model is (3.50/90) + 0.10 = 0.1389 or 13.89%. Using the CAPM formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate), we solve for Beta: 0.1389 = 0.05 + Beta * (0.13 - 0.05). Solving gives Beta ≈ 1.1.

Risk Metrics Company Is Expected to Pay a Dividend of $3.50