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Microsoft Stock Expected Return

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The beta of Microsoft's stock is 1.2, whereas the risk-free rate of return is 4 percent. Assume that the expected return on the market is 16 percent. Then, what is the expected return on Microsoft stock?

The return distribution for the asset XYZ is as shown below:

Return Probability
- 0.1 0.10
+ 0.1 0.40
+0.20 0.30
+0.30 0.20

What is the standard deviation for the XYZ returns?

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Solution Summary

There are two problems. Solution to first problem depicts the steps to calculate the expected return of a stock. Solution to second problem describes the steps to calculate mean and standard deviation of returns.

Solution Preview

Please refer attached file for better clarity of formulas and tables.

1.

Beta=b=1.2
Risk Free rate=rf=4%
Expected market return=rm=16%
Expected return on stock=rf+b*(rm-rf)=18.40%

2.

Expected Return
Probability, P Return(R) P*R
0.1 ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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