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 above

Question

Quizplus · Accepted Answer

We can use the dividend discount model to solve for the stock's expected return. First, we need to solve for the expected dividend in the next year, which is $3.50 * 1.10 = $3.85. Then, we can use the formula: 
Expected Return = (Expected Dividend / Stock Price) + Dividend Growth Rate
Expected Return = ($3.85 / $90) + 0.10 = 0.148, or 14.8%
Next, we can use the Capital Asset Pricing Model (CAPM) to solve for the beta: 
Expected Return = Risk-Free Rate + Beta * (Expected Market Return - Risk-Free Rate)
0.148 = 0.05 + Beta * (0.13 - 0.05)
Beta = 1.1, which is approximately equal to choice C. Therefore, answer is C) 1.1.

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