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Determining Return on Stock

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Suppose the expected return on the market portfolio is 13.8 percent and the
risk-free rate is 6.4 percent. Solomon Inc. stock has a beta of 1.2. Assume the capital-asset-pricing model holds.

Return on Stock= Rf+B(Rm-Rf)
Rf= risk free rate
B=beta
Rm= Expected return on market portfolio

A. What is the expected return on Solomon's stock?
B. If the risk-free rate decreases to 3.5 percent, what is the expected return on Solomon's stock?

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Solution Summary

What is the expected return on Solomon's stock?

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