In February 2011 the risk-free rate was 4.50 percent, the market risk premium was 7.00 percent, and the beta for Dell stock was 1.50. What is the expected return that was consistent with the systematic risk associated with the returns on Dell stock
To calculate the expected return consistent with the systematic risk associated with Dell stock returns, you can use the Capital Asset Pricing Model (CAPM) formula:
Expected Return = Risk-Free Rate + (Beta * Market Risk Premium)
Given:
Risk-Free Rate = 4.50%
Market Risk Premium = 7.00%
Beta for Dell Stock = 1.50
Plugging these values into the formula:
Expected Return = 4.50% + (1.50 * 7.00%)
Calculating the result:
Expected Return = 4.50% + 10.50%
Expected Return = 15.00%
Therefore, the expected return that is consistent with the systematic risk associated with the returns on Dell stock is 15.00%.
To calculate the expected return that is consistent with the systematic risk associated with the returns on Dell stock, you can use the Capital Asset Pricing Model (CAPM) formula. The CAPM equation is as follows:
Expected Return = Risk-Free Rate + (Beta * Market Risk Premium)
In this case, the given information is as follows:
Risk-Free Rate = 4.50%
Market Risk Premium = 7.00%
Beta (β) for Dell stock = 1.50
Substituting these values into the CAPM formula, we can calculate the expected return:
Expected Return = 4.50% + (1.50 * 7.00%)
To solve the equation, we first multiply the beta by the market risk premium:
(1.50 * 7.00%) = 10.50%
Next, we add the risk-free rate to the result:
4.50% + 10.50% = 15.00%
Therefore, the expected return that is consistent with the systematic risk associated with the returns on Dell stock is 15.00%.