Important Information About Expected Returns and Betas for Investment Selection
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You have been scouring The Wall Street Journal looking for stocks that are "good values" and have calculated the expected returns for five stocks. Assume the risk-free rate (rRF) is 7 percent and the market risk premium (rM - rRF) is 2 percent. Which security would be the best investment? (Assume you must choose just one).
Expected Return Beta
a. 9.01% 1.70
b. 7.06% 0.00
c. 5.04% -0.67
d. 8.74% 0.87
e. 11.50% 2.50
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Solution Summary
This solution is comprised of a detailed explanation to answer which security would be the best investment, including an excel spreadsheet with more detailed calculations attached.
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Expected Return Beta
a 9.01% 1.70
b 7.06% -
c 5.04% -0.67
d 8.74% 0.85
e 11.50% 2.50
We should find the required rate of return on each stock and compare with the expected return.
Stock a
Required return on Stock = ...
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