a stock has a beta of 1.1, the expected return on the market is 10.4 percent, and the risk-free rate is 4.75 percent. what must the expected return on this stock be?

The relationship between expected return for assets, particularly stocks, and systematic risk, or the general dangers of investing, is described by the Capital Asset Pricing Model (CAPM).

The needed return on an investment and risk are connected linearly under this financial model. The equity risk premium, or the expected return on the market less the risk-free rate, is the foundation of the concept. It is based on the link between an asset's beta, the risk-free rate (usually the rate on Treasury bills), and these two variables.

To quantify this systematic risk, the CAPM was created. Given the risk involved with the assets and the cost of capital, it is frequently used in finance to value hazardous securities and calculate expected returns.

To solve the question :

Converting all the values to decimal y multiplying by 100

Risk free rate = 4.75/100

= 0.475

Return on market = 10.4/100

= 0.104

The expected return on stock :

[tex]r_{i} = r_{f} + (r_{m} -r_{f} )\beta _{i}[/tex]

Where,

[tex]r_{i}[/tex] = expected return on stock

[tex]r_{f}[/tex] = risk-free rate

[tex]r_{m}[/tex] = return on the market

[tex]\beta_ {i}[/tex] = beta

Then,

[tex]r_{i}[/tex] = .0475 + (.1040 - .0475)(1.10)

[tex]r_{i}[/tex] = .1097, or 10.97%

Therefore, the expected return on this stock is 10.97 %

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