The risk-free rate is 5 percent and the market risk premium is 8 percent. Stock Y's beta is 1.85 and the standard deviation of its returns is 62.5 percent. What should be the stock's expected rate of return for the stock price to be considered in equilibrium?

Question

Quizplus · Accepted Answer

Using the Capital Asset Pricing Model (CAPM), the expected return on a stock is calculated as: Expected Return = Risk-Free Rate + Beta * (Market Risk Premium). Plugging in the given values: Expected Return = 5% + 1.85 * 8% = 5% + 14.8% = 19.8%.

The Risk-Free Rate Is 5 Percent and the Market Risk