Question

Steins Corp. has a beta of 1.7 and a standard deviation of returns of 19%. The return on the market portfolio is 10.55% and the risk-free rate is 2.72%. According to CAPM, what is the required rate of return on Stein's stock? Submit your answer as a percentage and round to two decimal places (EX. 0.00%)

Answer 1

Information provided:

Risk free arte= 2.72%

Beta= 1.7

Return on market portfolio= 10.55%

The required return on the stock is calculated using the Capital Asset Pricing Model (CAPM)

The formula is given below:

Ke=Rf+[E(Rm)-Rf]

Where:

Rf=risk-free rate of return which is the yield on default free debt like treasury notes

Rm=expected rate of return on the market.

= Stock’s beta

Ke= 2.72% + 1.7*(10.55 – 2.72)

     = 2.72% + 13.31%

     = 16.01%.

Therefore, the required return on Stein's  stock is 16.01%.

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