What does the Beta of a Stock Mean?
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Is the expected return on a stock with a beta=2.0 twice the expected return on a stock with a beta=1.0?
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Solution Summary
This solution illustrates how the required return on a stock is determined using the Capital Asset Pricing Model in 255 words.
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No. The Capital Asset Pricing Model states that:
Expected return on a stock = Risk-free-rate + (Beta*(Expected Market rate- Risk-free rate))
Because the risk-free rate is fixed (i.e. it does not vary with beta), the expected return on a stock with beta=2 will be less than twice the expected return of a stock with a beta=1. Here is an ...
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