Question

Jam inc stock has a beta of 0.9. The risk free rate is 5% and the expected return on the market is 11%. What is the expected rate of return on this stock.?

Answer 1

Risk free rate = 5%

Market return = 11%

Beta = 0.90

Expected rate of return is calculated below using CAPM formula:

Expected rate of return = Risk free rate + (Market Return - Risk free rate) × Beta

                                      = 5% + (11% - 5%) × 0.90

                                      = 5% + (6.00% × 0.90)

                                      = 5% + 5.40%

                                      = 10.40%

Hence, Expected rate of return of company stock is 10.40%.