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Dees fashions has a growth rate of 3.2 percent and is equally as risky as the market while its stock is currently selling for $32 a share. The overall stock market has a return of 10.9 percent and a risk premium of 6.8 percdnt. What is the expected rate of return on this stock?

A) 11.3 percent
B) 11.7 percent
C) 10.9 percent
D) 9.2 percent
E) 10.0 percent

Respuesta :

Answer:

C) 10.9 percent

Explanation:

In this question, we use the Capital Asset Pricing Model (CAPM) formula which is presented below

Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)

where,

The Market rate of return - Risk-free rate of return) is also known as the market risk premium and the same is applied.

Since in the question it is said that the stock is risky that means the beta should be 1 and the return of the stock market is 10.9% which equals to the expected rate of the stock i.e 10.9%

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