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2 October, 01:28

A stock has a beta of 1.00, the expected return on the market is 10 percent, and the risk-free rate is 3 percent. What must the expected return on this stock be? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)

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  1. 2 October, 01:48
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    The expected return on this stock be 17.00%

    Explanation:

    According to the Capital Asset Pricing Model (CAPM), the formula to compute expected rate of return is shown below:

    Expected rate of return = Risk Free rate + Beta * (Market rate - Risk free rate)

    Where, (Market rate - Risk free rate) this part is also known as market risk premium

    So, expected rate of return = 10% + 1.00 * (10% - 3%)

    = 10% + 1.00 * 7%

    = 10% + 7%

    = 17.00%

    Hence, the expected return on this stock be 17.00%
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