SOLUTION: Question: A stock has an expected return of 14%, the risk free rate is 4% and the market risk premium is 6% what must the beta of this stock be?
Solution provided by the lecture
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Solution provided by the lecture
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Question 147294: Question: A stock has an expected return of 14%, the risk free rate is 4% and the market risk premium is 6% what must the beta of this stock be?
Solution provided by the lecturer:
State the variables:
E(Ri) = 14%, Rf = 4%, market risk premium = 6%
We are given all the values for the CAPM except for βi of the stock. We need to substitute these values into the CAPM, and solve for βi of the stock.
Remember, we are given the market risk premium!! The market risk premium is the expected return of the market minus the risk-free rate:
Market Risk Premium = E(Rm) - Rf
E(Ri) = Rf + βi * Market risk premium
CAPM : E(Ri) = Rf + βi(E(Rm)-Rf)
0.14 = 0.04 + βi 0.06
βi = 1.67
My solution:
E(Ri) = Rf + βi[E(Rm)-Rf]
0.14 = 0.04 + βi(0.06)
I cannot for the life of me understand or workout how the lecturer came up with a βi of 1.67!!
I realise this is a simple and stupid question but i would really appreciate any help given in regards to this question:)
Also it question did not come from a text book its part of my tutorial homework so i do not have the text book details.
Regards,
Andrew Beshara
