Expected Return on Stock Calculation: How to Determine It

How can we calculate the expected return on a stock?

The expected return on a stock can be calculated using the Capital Asset Pricing Model (CAPM), which is represented by the following formula: Expected Return = Risk-free Rate + Beta × (Market Return - Risk-free Rate). In this case, the stock has a beta of 1.36, the expected return on the market is 10 percent, and the risk-free rate is 2.5 percent. What must the expected return on this stock be?

To determine the expected return on a stock, we can use the Capital Asset Pricing Model (CAPM) formula. This formula takes into account the risk-free rate, the beta of the stock, and the expected return on the market.

The CAPM formula is: Expected Return = Risk-free Rate + Beta × (Market Return - Risk-free Rate). By plugging in the values given in this case, we can calculate the expected return on this stock.

Expected Return = Risk-free Rate + Beta × (Market Return - Risk-free Rate) Expected Return = 2.5% + 1.36 × (10% - 2.5%) Expected Return = 2.5% + 1.36 × 7.5% Expected Return = 2.5% + 10.2% Expected Return = 12.7%