The stock of ABC, Inc.has a beta of .80.The market rate of return is expected to increase by by 5%.Beta predicts that ABC stock should
A)increase in value by 6.25%.
B)increase in value by 4.0%.
C)decrease in value by 1.0%.
D)increase in value by .8%.

Question

Quizplus · Accepted Answer

Using the Capital Asset Pricing Model (CAPM), the formula for calculating the expected return on a stock is:

Expected Return = Risk-free rate + Beta x (Market rate of return - Risk-free rate)

Assuming the risk-free rate remains constant, and because the market rate of return is expected to increase by 5%, we can calculate ABC's expected return as follows:

Expected Return = Risk-free rate + 0.80 x (0.05) = Risk-free rate + 0.04

Since we don't know the risk-free rate, we cannot calculate an exact expected return for ABC. However, we know that if the market rate of return increases by 5%, and ABC's beta is 0.80, then its expected return should increase by 0.80 x 5% = 4%.

Therefore, the correct answer is B, "increase in value by 4.0%".

The Stock of ABC, Inc