Consider the single-index model. The alpha of a stock is 0%. The return on the market index is 16%. The risk-free rate of return is 5%. The stock earns a return that exceeds the risk-free rate by 11%, and there are no firm-specific events affecting the stock performance. The beta of the stock isQuestion 7Select one:a.1.20b.1.10c.1.00d.0.90
Question
Consider the single-index model. The alpha of a stock is 0%. The return on the market index is 16%. The risk-free rate of return is 5%. The stock earns a return that exceeds the risk-free rate by 11%, and there are no firm-specific events affecting the stock performance. The beta of the stock isQuestion 7Select one:a.1.20b.1.10c.1.00d.0.90
Solution
The beta of a stock in the single-index model can be calculated using the formula:
Beta = (Return of Stock - Risk-Free Rate) / (Market Return - Risk-Free Rate)
Given in the question, the return of the stock exceeds the risk-free rate by 11%. So, the return of the stock is 11% + 5% = 16%.
Substituting the given values into the formula:
Beta = (16% - 5%) / (16% - 5%) = 1.00
So, the beta of the stock is 1.00. Therefore, the correct answer is c. 1.00.
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