Question

Stock A beta is 1.2 and the risk premium of the stock in the same industry is 5.5%. If the risk free rate of return is 3.5%, calculate the expected return on stock A.       

2)

1. Given the following stock return over a 5-year period, calculate the geometric return.

                             

Year	2013	2014	2015	2016	2017
Return	10%	-2%	5%	8%	11%

Answer 1

Answer 1

Expected return = Risk free rate + (Beta x Risk premium)

Expected return = 3.5% + (1.2 x 5.5%)

Expected return = 3.5% + 6.6%

Expected return = 10.1%

Answer 2

r = rate of return of each year

n = number of years

Geometric return = 0.0629 or 6.29%