 View Question
Q: Finance ( Answered ,   0 Comments ) Question
 Subject: Finance Category: Business and Money > Finance Asked by: lola5-ga List Price: \$10.00 Posted: 23 Apr 2005 17:42 PDT Expires: 23 May 2005 17:42 PDT Question ID: 513288
 ```If the expected return on the market is 13.8 percent and the risk-free rate is 6.4 percent and a certain company stock has a beta of 1.2, then what is the expected rate of return on the stock and if the risk free rate decreases to 3.5 percent, what is the expected return on the stock?``` Subject: Re: Finance Answered By: markj-ga on 23 Apr 2005 18:08 PDT Rated: ```lola5 -- Your answer with a 6.4% risk-free rate is 15.28%. Your answer with a 3.5% risk-free rate is 15.86% Here is how you can reproduce it for yourself. Since you know the risk-free rate(s), the expected market return and the beta of the stock, you can use the calculator at this linked site to quickly determine the return on each stock in the portfolio: Money Chimp: CAPM Calculator http://www.moneychimp.com/articles/valuation/capm.htm Using that calculator, you can simply plug in the risk-free rate, the market rate and the beta of the stock. The calculated result is termed the "risk-adjusted discount rate," which, according to the formula explained at the linked site, is "the expected return rate . . . ." A fuller definition or "expected return" of a stock can be found in the Forbes Financial Glossary: "Expected return The expected return on a risky asset based on a probability distribution for the possible rates of return. Expected return equals some risk free rate (generally the prevailing U.S. Treasury note or bond rate) plus a risk premium (the difference between the historic market return, based upon a well diversified index such as the S&P 500 and the historic U.S. Treasury bond) multiplied by the assets beta. The conditional expected return varies through time as a function of current market information." Search Strategy: I found the calculator (and much other information about expected rates of return) using the following Google search: expected market return equals beta ://www.google.com/search?num=100&hl=en&lr=&safe=off&c2coff=1&rls=GGLD%2CGGLD%3A2004-01%2CGGLD%3Aen&q=expected+market+return+equals+beta I am confident that this is answer you are seeking. If anything is unclear, please ask for clarification before rating the answer. markj-ga```
 lola5-ga rated this answer:   