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The risk-free return is 4.62%, the inflation rate is 3.14%, and the expected return on the...

The risk-free return is 4.62%, the inflation rate is 3.14%, and the expected return on the market is 12.85%. What is the expected real return for Hantz stock if it has a beta of 0.81? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

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Answer #1

E(RH) = Rf + (βH × [E(RM) – Rf])

= .0462 + (0.81 × [.1285 – .0462])

= .0462 + (0.81 × .0823)

= .0462 + .0667

= .1129 or 11.29%

Expected real return for Hantz = [(1 + expected return for Hantz stock) ÷ (1+inflation rate)] – 1

= [(1 + .1129) ÷ (1 + .0314)] – 1

= [1.1129 ÷ 1.0314] – 1

= .0790 or 7.90%

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