A stock has an expected return of 12 percent, its beta is 1.30, and the risk-free rate is 5 percent. The expected return on the market must be 10.38%
The expected return is the amount of income or loss an investor can assume receiving on an investment. An expected go back is calculated by multiplying ability results through the odds of them occurring after which totaling those effects.
To calculate the expected return on the market follows the following steps:
Given
Expected return = 12%
Beta = 1.30
Risk Free Rate = 5%
Expected stock return = Risk-free rate + Beta * ( Expected return on market - Risk-free rate )
12 = 5 + 1.3 * ( Expected return on market - 5 )
12 - 5 = 1.3 * ( Expected return on market - 6.5 )
Expected return on market = ( 12 - 5 + 6.5 ) / 1.3
Expected return on market = 10.38%
Beta correctly describes the pastime of a security's returns because it responds to swings in the marketplace. A safety's beta is calculated by way of dividing the made from the covariance of the safety's returns and the market's returns by the variance of the market's returns over a distinct length.
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