Asked by Jennifer Marcoccia on Jul 22, 2024
Verified
A stock has a beta of.8 and an expected return of 6%. The risk-free rate is 3%. What is the expected return on the market?
A) 3.50%
B) 3.75
C) 4.50%
D) 5.25%
E) 6.75%
Beta
A measure of a stock's volatility in relation to the overall market; a beta above 1 indicates greater volatility than the market, while a beta below 1 indicates less.
Risk-Free Rate
A hypothetic return rate on a risk-free investment, usually shown by the returns on government securities.
Expected Return
The weighted average of all possible returns from an investment, accounting for the likelihood of each outcome.
- Understand the relationship between risk-free rate, market rate, and the expected return of an investment.
Verified Answer
GC
Gianna CanizioJul 24, 2024
Final Answer :
E
Explanation :
The expected return on the market can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Rearranging the formula to solve for the Market Return gives us: Market Return = ((Expected Return - Risk-Free Rate) / Beta) + Risk-Free Rate. Plugging in the given values: Market Return = ((6% - 3%) / 0.8) + 3% = 6.75%.
Learning Objectives
- Understand the relationship between risk-free rate, market rate, and the expected return of an investment.