A stock has an expected return of 14.3 percent, the risk-free rate is 3.2 percent, and the market risk premium is 8.1 percent. What must the beta of this stock be?
A) 0.88
B) 0.94
C) 1.08
D) 1.21
E) 1.37

Question

Quizplus · Accepted Answer

The capital asset pricing model (CAPM) can be used to calculate the expected return of a stock.

CAPM formula:

Expected Return = Risk-Free Rate + Beta x Market Risk Premium

Plugging in the given values:

14.3% = 3.2% + Beta x 8.1%

Beta = (14.3% - 3.2%) / 8.1%

Beta = 1.37

Therefore, the answer is choice E.

A Stock Has an Expected Return of 14