The risk-free rate is 3.9 percent and the market expected return is 11.4 percent. What is the expected return of a stock that has a beta of 1.24?

To calculate the expected return of a stock using the Capital Asset Pricing Model (CAPM), we use the following formula:

\[
\text{Expected Return} = R_f + \beta \times (R_m - R_f)
\]

Where:
- \( R_f \) is the risk-free rate (3.9% or 0.039),
- \( \beta \) is the stock's beta (1.24),
- \( R_m \) is the market expected return (11.4% or 0.114),
- \( R_m - R_f \) is the market risk premium.

Now, applying the numbers:

\[
\text{Expected Return} = 0.039 + 1.24 \times (0.114 - 0.039)
\]

Let's compute the expected return.

The expected return of the stock, based on the given information and using the CAPM formula, is 13.2%.

Would you like more details or have any questions? Here are some related questions:

1. How does beta impact a stock's expected return?
2. What does a higher beta signify in terms of risk and return?
3. How would the expected return change if the market expected return increases?
4. What if the risk-free rate changes? How does that affect the expected return?
5. Can CAPM be applied to portfolios instead of individual stocks?

**Tip:** A stock with a beta greater than 1 is considered more volatile than the market, while a beta less than 1 suggests it is less volatile.

Learn how to calculate the expected return of a stock using the Capital Asset Pricing Model (CAPM) with a risk-free rate of 3.9%, market expected return of 11.4%, and a beta of 1.24. This step-by-step guide covers key financial concepts such as risk, return, and market risk premium.

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