5. Investors expect the market rate of return this year to be 10%. The expected rate of return on a stock with a beta of 1.2 is currently 12%. If the market-return this year turns out to be 8%, how would you revise your expectation of the rate of return on the stock? Explain

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Business

Colin Bray

21 January, 00:14

5. Investors expect the market rate of return this year to be 10%. The expected rate of return on a stock with a beta of 1.2 is currently 12%. If the market-return this year turns out to be 8%, how would you revise your expectation of the rate of return on the stock? Explain

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Nico Hendricks · Answer 1

Revised Expected Rate of Return is 9.6%

Explanation:

The change in market return will have implications on the expected rate of return which can be calculated using the CAPM formula for the change in the market return:

Change in Expected return = Beta * (Change in Market Return)

Change in Expected return = 1.2 * (8% - 10%) = (2.4%)

The Expected rate of return would be decreased by 2.4% and now the revised expected rate of return is:

Revised Expected Rate of Return = 12% - 2.4% = 9.6%