Asked by Jason Brownlee on Jul 06, 2024
Verified
Asset A has an expected return of 15%. The expected market return is 14% and the risk-free rate is 4%. What is asset A's beta?
A) 0.80
B) 1.10
C) 1.40
D) 1.80
E) 2.00
Beta
An indicator of how much a stock's price movement varies compared to the general market, signifying its relative risk to the market norm.
Expected Return
A statistical measure of the mean or average return from an investment, considering historical or anticipated performance, often used in financial analysis.
Market Return
The total return of an investment market, comprising both capital gains and dividends or interest, over a given period.
- Analyze the relationship between risk-free rate, market risk premium, and the expected rate of return on stocks using the concept of beta.
Verified Answer
HF
Hailey FlanaganJul 12, 2024
Final Answer :
B
Explanation :
Asset A's beta can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Plugging in the values: 15% = 4% + Beta * (14% - 4%), solving for Beta gives 1.10.
Learning Objectives
- Analyze the relationship between risk-free rate, market risk premium, and the expected rate of return on stocks using the concept of beta.