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5 July, 17:33

A stock has a beta of 1.15, the expected return on the market is 10.3 percent, and the risk-free rate is 3.1 percent. What must the expected return on this stock be?

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  1. 5 July, 19:57
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    The expected return on this stock is 11.38%.

    Explanation:

    We apply the Capital Asset Pricing Model (CAPM) to solve the problem.

    Under the CAPM, we have:

    Return on a stock = Risk-free rate + Beta * (Return on Market - Risk free rate).

    in which:

    Risk-free rate is given at 3.1%;

    Beta is given at 1.15;

    Return on Market is given at 10.3%;

    So:

    Return on a stock = Risk-free rate + Beta * (Return on Market - Risk free rate) = 3.1% + 1.15 * (10.3% - 3.1%) = 11.38%.

    Thus, the answer is 11.38%.
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