Question

A stock has a beta of 1.10, the expected return on the market is 10%, and the risk-free rate is 2.5%. What must the expected return on this stock be?

**ENTER YOUR ANSWER AS A PERCENTAGE WITH ONE DECIMAL PLACE (e.g., 12.1) AND NOT AS A DECIMAL (e.g., 0.121). ROUND TO THE NEAREST TENTH OF A PERCENT.**

Answer 1

Expected return = Risk free rate + beta (market return - risk free rate)

Expected return = 2.5% + 1.1 (10% - 2.5%)

Expected return = 2.5% + 8.25%

Expected return = 10.8%