$\begin{array}{llcc}
\text {Expected return on the market } &13\% \
\text { Standard deviation of the market } &21\%\
\text { Risk-free rate} &5.5\%\
\text { Correlation coefficient between }&\
\text { Stock A and the market } & 0.65 \
\text { Stock B and the market } & 0.28 \
\text { Standard deviation of Stock A } & 64 \% \
\text { Standard deviation of Stock B } & 53 \%
\end{array}$

-What is the expected return of Stock B?
A) 9.24%
B) 9.87%
C) 10.83%
D) 10.24%
E) 11.23%

Question

$\begin{array}{llcc}
  \text {Expected return on the market   } &13\%  \
 \text { Standard deviation of the market } &21\%\
 \text {  Risk-free rate} &5.5\%\
\text { Correlation coefficient between }&\
\text { Stock A and the market } & 0.65 \
\text { Stock B and the market } & 0.28 \
\text { Standard deviation of Stock A } & 64 \% \
\text { Standard deviation of Stock B } & 53 \%
\end{array}$

-What is the expected return of Stock B?
A) 9.24%
B) 9.87%
C) 10.83%
D) 10.24%
E) 11.23%

Quizplus · Accepted Answer

The expected return of Stock B can be calculated using the Capital Asset Pricing Model (CAPM): $ E(R_B) = R_f + \beta_B (E(R_m) - R_f) $. First, calculate $\beta_B = \frac{\text{Correlation}(B, \text{Market}) \times \text{Std Dev}(B)}{\text{Std Dev}(\text{Market})} = \frac{0.28 \times 53\%}{21\%} = 0.7067$. Then, $ E(R_B) = 5.5\% + 0.7067 \times (13\% - 5.5\%) = 10.83\%$.

-What Is the Expected Return of Stock B? A) 9

-What Is the Expected Return of Stock B?
A) 9