The market’s required return on Gitche Gumee Oil Company stock is currently 13.8 percent. If the expected return on the market portfolio is 12.6 percent and the risk-free rate is 3.5 percent, what is the beta of Gitche Gumee stock?
To find the beta of Gitche Gumee Oil Company stock, we can use the formula:
Beta = (Expected Return on Stock - Risk-Free Rate) / (Expected Return on Market - Risk-Free Rate)
Here, the expected return on the stock is the market's required return, which is 13.8 percent. The expected return on the market portfolio is 12.6 percent, and the risk-free rate is 3.5 percent.
So, we can substitute these values into the formula:
Beta = (13.8% - 3.5%) / (12.6% - 3.5%)
Simplifying the equation:
Beta = 10.3% / 9.1%
Beta ≈ 1.13
Therefore, the beta of Gitche Gumee Oil Company stock is approximately 1.13.