A stock with a beta of 0.9 has an expected rate of return of 10%. If the market return this year turns out to be 8 percentage pointsbelow expectations, what is your best guess as to the rate of return on the stock? (Do not round intermediate calculations. Enteryour answer as a percent rounded to 1 decimal place.)Stock return%

Answered: A stock with a beta of 0.9 has an…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 3P

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A stock with a beta of 0.9 has an expected rate of return of 10%. If the market return this year turns out to be 8 percentage points
below expectations, what is your best guess as to the rate of return on the stock? (Do not round intermediate calculations. Enter
your answer as a percent rounded to 1 decimal place.)
Stock return
%

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Introduction

The question can be answered by determining the return for the stock using the capital asset pricing model (CAPM). The capital asset pricing model describes the relationship between the expected return and the risk associated with that investment. The expected return can be calculated based on the risk-free rate, the beta of the security, and the expected return of the market. The risk born by the investors signifies the compensation made to the investors in the form of a risk premium.

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