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the treasury bill rate is 4%, and the expected return on the market portfolio is 12%. according to the capital asset pricing model, if the market expects a return of 22% from stock x, what is its beta? (express your answer after rounding up to two decimal places)

Answer :

The beta of Stock X is 1.80.

Beta measures the volatility of a stock in relation to the overall market. The Beta of the Market Portfolio is 1.00, as it is the benchmark against which other stocks are compared. To calculate the Beta of Stock X, we need to use the Capital Asset Pricing Model (CAPM).

CAPM states that the expected return of a security is equal to the risk-free rate plus the stock’s Beta multiplied by the difference between the expected return on the market and the risk-free rate.

Therefore, the expected return of Stock X can be expressed as:

Expected Return on Stock X = 4% + (1.80 * (12% - 4%)

Expected Return on Stock X = 22%

We can rearrange this equation to solve for the Beta of Stock X:

1.80 = (22% - 4%) / (12% - 4%)

1.80 = 18% / 8%

1.80 = 2.25

Therefore, the Beta of Stock X is 1.80 (rounded up to two decimal places).

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