Investors expect the Market Rate of Return to be 10%…?

The expected rate of return on a stock, with beta of 1.2, is currently 12%. If the market return this year turns out to be 8%, how would you revise your expectation of the rate of return on the stock?

Is it:

(1.2) x (8%) = 9.6% ?

2 Answers

  • 1. Yes, it is 9.6%, on the assumption that the Risk Free Return is 0.0%

    2. The formula for calculating return is:

    Expected rate of return = (Risk free return)+Beta{(Market Return)-(Risk free return)}

    3. Existing:

    12% = (0.0%)+1.2{(10%)-(0.0%)}

    4. Revised:

    9.6%= (0.0%)+1.2{(8%)-(0.0%)}

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