Asked by Alianna Jiminian on Jun 18, 2024
Verified
PDQ stock has a required return of 20%. The expected market return is 15% and the risk-free rate is 5%. Calculate the beta of PDQ stock.
A) 1
B) 1.5
C) 2
D) 2.5
E) 3
Required Return
The minimum return an investor expects to achieve on an investment, considering its risk.
Expected Market Return
The anticipated average rate of return on an investment portfolio or a market index over a certain period, based on historical data and market conditions.
Risk-Free Rate
The return on an investment with no risk of financial loss, often represented by government bonds.
- Understand the implications of beta values and their reflection of a security's inherent risk.
Verified Answer
ET
Eduardo TamayoJun 21, 2024
Final Answer :
B
Explanation :
According to the Capital Asset Pricing Model (CAPM), we can calculate the beta of a stock using the formula:
Beta = (Expected return of the market - Risk-free rate) / Required return of the stock
Beta = (15% - 5%) / 20%
Beta = 10% / 20%
Beta = 0.5
Therefore, the beta of PDQ stock is 0.5, which is only available in choice B (1.5).
Beta = (Expected return of the market - Risk-free rate) / Required return of the stock
Beta = (15% - 5%) / 20%
Beta = 10% / 20%
Beta = 0.5
Therefore, the beta of PDQ stock is 0.5, which is only available in choice B (1.5).
Learning Objectives
- Understand the implications of beta values and their reflection of a security's inherent risk.