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

Question

Business

Mira Osborn

12 December, 19:11

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

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Answers (1)

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Wyatt Moses · Answer 1

Answer: 9.6%

Explanation:

Expected rate of return on the stock will change by beta times the unanticipated

change in the market return:

1.2 (.08 -.10) = - 2.4%

• Therefore, the expected rate of return on the stock should be revised to:

.12 -.024 = 9.6%