Steins Corp. has a beta of 1.7 and a standard deviation of returns of 19%. The...

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%)

Solutions

Expert Solution

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%.

In case of any query, kindly comment on the solution.

jeff jeffy answered 6 months ago

Next > < Previous

Related Solutions

THY stock has an expected return of 19 percent with a beta of 1.7, while Pegasus...

THY stock has an expected return of 19 percent with a beta of 1.7, while Pegasus stock has an expected return of 14 percent with a beta of 1.2. Assume the CAPM is true. What is the expected return on the market? What is the risk-free rate? Note: beta of the market is one, CAPM is defined with security market line.

If Market Beta is 1.5 & VEDANTA Share Standard Deviation is 5.4%. If Market (NIFTY) Returns...

If Market Beta is 1.5 & VEDANTA Share Standard Deviation is 5.4%. If Market (NIFTY) Returns expected in FY 2019-20 are 15%. Investor is in dilemma to Invest in BANK OR VEDANTA Security (Share). Compared to just Keeping Money in SBI / Good Savings Account @ 4% and FD at 6.5% . What can be the Expected RETURNS of VEDANTA Share in FY 2019-20 w.r.t. Capital Asset Pricing Model?

The standard deviation of returns on Carlson company’s common stock is 37%, and Carlson’s beta coefficient...

The standard deviation of returns on Carlson company’s common stock is 37%, and Carlson’s beta coefficient is 0.9. Currently, yields on Treasury Bills are 5.5%, while the average yield on Treasury Bills over the past seventy years has been 3.7%. The standard deviation of market returns is 22%. The return on the overall market last year was 10.2%, while the average market return over the past seventy years has been 12.2%. (a) Provide an estimate of the expected return on...

What is the standard deviation of the returns?

You are analyzing the returns of a mutual fund portfolio for the past 5 years. Year Return 2014 -30% 2015 -25% 2016 40% 2017 -10% 2018 15% What is the standard deviation of the returns?

stock a has a beta of 1.6 and a standard deviation of 25%. stock b has...

stock a has a beta of 1.6 and a standard deviation of 25%. stock b has a beta of 1.4 and a standard deviation of 20%. portfolio ab was created by investing in a combination of stocks a and b. portfolio ab has a beta of 1.25 and a standard deviation of 18%. which of the following statements is correct? Stock A has more market risk than Portfolio AB. Stock A has more market risk than Stock B but less...

Stock R has a beta of 1.7, Stock S has a beta of 0.6, the expected...

Stock R has a beta of 1.7, Stock S has a beta of 0.6, the expected rate of return on an average stock is 11%, and the risk-free rate of return is 6%. By how much does the required return on the riskier stock exceed the required return on the less risky stock? Round your answer to two decimal places.

The standard deviation of the market index portfolio is 10%. Stock A has a beta of...

The standard deviation of the market index portfolio is 10%. Stock A has a beta of 2 and a residual standard deviation of 20%. A) calculate the total variance for an increase of .10 in its beta. B) calculate the total variance for an increase of 1% in its residual standard deviation.

A stock has an expected return of 1%, a beta of 1.3, and a standard deviation...

A stock has an expected return of 1%, a beta of 1.3, and a standard deviation of 19%. The risk-free rate is 4.5%. What is the market risk premium? 5.77% 6.11% 5.11% 4.79% 4.29%

The standard deviation of Asset A returns is 36%, while the standard deviation of Asset M...

The standard deviation of Asset A returns is 36%, while the standard deviation of Asset M returns in 24%. The correlation between Asset A and Asset M returns is 0.4. (a) The average of Asset A and Asset M’s standard deviations is (36+24)/2 = 30%. Consider a portfolio, P, with 50% of funds in Asset A and 50% of funds in Asset M. Will the standard deviation of portfolio P’s returns be greater than, equal to, or less than 30%?...

A population has a mean of 50 and a standard deviation of 19. If a random...

A population has a mean of 50 and a standard deviation of 19. If a random sample of 64 is taken, what is the probability that the sample mean is each of the following? a. Greater than 52 b. Less than 51 c. Less than 48 d. Between 46.5 and 53.5 e. Between 50.8 and 51.2

Subjects