The common stock of CTI has an expected return of 14.48 percent. The return on the market is 11.6 percent and the risk-free rate of return is 3.42 percent. What is the beta of this stock?

A) .95

B) 1.49

C) 1.31

D) 1.42

E) 1.35

Question

The common stock of CTI has an expected return of 14.48 percent. The return on the market is 11.6 percent and the risk-free rate of return is 3.42 percent. What is the beta of this stock?

A) .95

B) 1.49

C) 1.31

D) 1.42

E) 1.35

BlackTom AI · Accepted Answer

We start by identifying the relevant relationships from the CAPM: E(Ri) = Rf + beta_i * (E(Rm) - Rf).

First, compute the market risk premium: E(Rm) - Rf = 11.6% - 3.42% = 8.18% (0.0818 in decimal).

Next, plug in the stock's expected return and risk-free rate to solve for beta:
beta = [E(Ri) - Rf] / [E(Rm) - Rf] = (14.48% - 3.42%) / 8.18% = 11.06% / 8.18% ≈ 1.351.

Rounding to two decimal places gives beta ≈ 1.35.

Now evaluate the provided options (conceptually, since the exact list isn’t shown here):
- If beta were 0.95, the expected return would be Rf + 0.95*(Rm - Rf) ≈ 3.42% + 0.95*8.18% ≈ 11.19%, which is far below 14.48%, so A is incorrect.
- If beta were 1.49, expected return would be 3.42% + 1.49*8.18% ≈ 15.62%, which is higher than 14.48%, so B is incorrect.
- If beta were 1.31, expected return would be 3.42% + 1.31*8.18% ≈ 14.13%, which is still below 14.48%, so C is incorrect.
- If beta were 1.42, expected return would be 3.42% + 1.42*8.18% ≈ 15.03%, which is above 14.48%, so D is incorrect.
- If beta were 1.35, expected return would be 3.42% + 1.35*8.18% ≈ 14.46%, which is extremely close to 14.48% and aligns with rounding, so E is correct.

In summary, solving the CAPM equation yields beta ≈ 1.35, which corresponds to option E. The other betas produce expected returns that diverge from the given 14.48%, revealing the mismatches.

FINA2201.34827.202330 FINA 2201 Chapters 13 and 14 Assignment

The common stock of CTI has an expected return of 14.48 percent. The return on the market is 11.6 percent and the risk-free rate of return is 3.42 percent. What is the beta of this stock? A) .95 B) 1.49 C) 1.31 D) 1.42 E) 1.35

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