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Q6B.

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Essentials Of Investments
Found in: Page 225
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

What is the expected rate of return for a stock that has a beta of 1 if the expected return on the market is 15%?

a. 15%.

b. More than 15%.

c. Cannot be determined without the risk-free rate.

The correct answer is: Option ‘c’

See the step by step solution

Step by Step Solution

Definition

The anticipation of an investor to receive a return on investment is known as expected rate of return. It is calculated by multiplying the potential outcomes by the chances that they will occur, and then adding them together,

Explanation

The formula for expected rate of return = E (r) = rf + β [E(rM -rf)]

In the above scenario, substituting β = 1 and E(rM) = 15%

E (r) = rf + 1[(15 – rf)]

E (r) = 15%

Therefore the correct answer is option ‘a’.

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