The common stock of flavorful teas has an expected return of 16. 35 percent. The return on the market is 13. 5 percent and the risk-free rate of return is 4. 0 percent. the beta of this stock is 1.3.
The beta of the stock can be calculated by rearranging the expected return formula.
The expected return formula is given below
Expected return = Risk-free rate of return x Beta( Return on market - Risk-free rate of return)
The given data is
Risk-free rate of return = 4%
Return on the market = 13.5%
Expected return = 16.35%
Beta =?
Expected return = Risk-free rate of return x Beta( Return on market - Risk-free rate of return)
16.35% = 4% x Beta(13.5% - 4%)
16.35% - 4% = Beta (9.5%)
12.35% / 9.5% = Beta
Beta = 1.3
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