Assume that a security is fairly priced and has an expected rate of return of 0.13.The market expected rate of return is 0.13 and the risk-free rate is 0.04.The beta of the stock is
A) 1.25.
B) 1.7.
C) 1.
D) 0.95.
E) none of these

Question

Quizplus · Accepted Answer

The beta of the stock is equal to the ratio of the expected excess return of the stock over the risk-free rate to the expected excess return of the market over the risk-free rate. Given that the expected rate of return of the stock is equal to the market expected rate of return, the expected excess return of the stock over the risk-free rate is 0.13 - 0.04 = 0.09. The expected excess return of the market over the risk-free rate is also 0.13 - 0.04 = 0.09. Therefore, the beta of the stock is 0.09/0.09 = 1. Answer choice (C) is correct.

Assume That a Security Is Fairly Priced and Has an Expected