A stock has an expected return of 10 percent, the risk-free rate is 6 percent, and the market risk premium is 5 percent. The beta of this stock must be . Note that the market risk premium is given.
To find the beta of a stock, we can use the Capital Asset Pricing Model (CAPM) formula:
Beta = (Expected Return - Risk-Free Rate) / Market Risk Premium
In this case, the expected return is 10 percent, the risk-free rate is 6 percent, and the market risk premium is 5 percent.
Substituting the given values into the formula, we get:
Beta = (0.10 - 0.06) / 0.05
Simplifying the equation, we have:
Beta = 0.04 / 0.05
Calculating this, we find that the beta of the stock is 0.80.
Therefore, the beta of this stock is 0.80, indicating that it is less volatile than the overall market.