BJB, Inc. stock has an expected return of 15.15 percent. The risk-free rate is 3.8 percent and the market risk premium is 8.6 percent. What is the stock's beta?

Question

BlackTom AI · Accepted Answer

We start by recalling the CAPM relationship: Expected return = Risk-free rate + Beta × Market risk premium.

Option 1: 1.21
If beta were 1.21, the expected return would be 3.8% + 1.21 × 8.6% = 3.8% + 10.406% = 14.206%. This is lower than the given 15.15%, so this beta underestimates the required return.

Option 2: 1.48
If beta were 1.48, the expected return would be 3.8% + 1.48 × 8.6% = 3.8% + 12.728% = 16.528%. This is higher than the given 15.15%, so this beta overestimates the required return.

Option 3: 1.32
If beta were 1.32, the expected return would be 3.8% + 1.32 × 8.6% = 3.8% + 11.352% = 15.152%. This is essentially 15.15%, matching the provided expected return when rounded, so this beta is consistent with the CAPM equation.

Option 4: 1.19
If beta were 1.19, the expected return would be 3.8% + 1.19 × 8.6% = 3.8% + 10.234% = 14.034%. This is well below 15.15%, so this beta does not align with the given data.

In summary, each option is checked by plugging beta into the CAPM formula and comparing the resulting expected return to the stated 15.15%. The value that yields a matching return is the one that aligns with the CAPM calculation for the given risk-free rate and market premium, which corresponds to beta ≈ 1.32.

FIN 220 01 Final Exam _ Fall 2025

BJB, Inc. stock has an expected return of 15.15 percent. The risk-free rate is 3.8 percent and the market risk premium is 8.6 percent. What is the stock's beta?

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