The stock of Martin Industries has a beta of 1.43. The risk-free rate of return is 3.6 percent, and the market risk premium is 9 percent. What is the expected rate of return?
Question
The stock of Martin Industries has a beta of 1.43. The risk-free rate of return is 3.6 percent, and the market risk premium is 9 percent. What is the expected rate of return?
Solution
The expected rate of return can be calculated using the Capital Asset Pricing Model (CAPM) formula:
Expected Return = Risk-Free Rate + Beta * Market Risk Premium
Given in the problem, we have:
Risk-Free Rate (Rf) = 3.6% Beta (β) = 1.43 Market Risk Premium (Rm-Rf) = 9%
Substituting these values into the formula, we get:
Expected Return = 3.6% + 1.43 * 9% Expected Return = 3.6% + 12.87% Expected Return = 16.47%
So, the expected rate of return on the stock of Martin Industries is 16.47%.
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