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# Estimating the value of beta of given stock

(Beta and required return) The riskless return is currently 6%, and Chicago Gear has estimated the contingent returns given here.
a. Calculate the expected returns on the stock market and on Chicago Gear stock.
b. What is Chicago Gear's beta?
c. What is Chicago Gear's required return according to the CAPM?

State of Economy Probability Stock Market Chicago Gear
Stagnant 0.2 -9% -16%
Slow 0.35 10% 15%
Average 0.3 14% 25%
Rapid 0.15 25% 35%

#### Solution Preview

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

a. Calculate the expected returns on the stock market and on Chicago Gear stock.
Expected return on stock market = 0.2*-9% + 0.35*10% + 0.30*14%+0.15*25%=9.65%
Expected return on Chicago Gear = 0.2*-16% + 0.35*15% + 0.30*25%+0.15*35%=14.80%

b. ...

#### Solution Summary

Solution describes the steps to estimate the value of beta in the given case. It also calculates required return according to CAPM.

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