Investors expect the Market Rate of Return to be 10%…?
If the market's expected rate of return is 10%, and the anticipated return on a stock with a beta of 1.2 is 12%, how should your expectations for the stock's return change if the actual market return for the year turns out to be 8%?
1 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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