Financial Risk Manager Part 1

The expected return on the stock is given by the Capital Asset Pricing Model (CAPM) formula:

$r_f + \beta(r_m - r_f)$

Where:

• $r_f$ = risk-free rate = 2.1%
• $r_m$ = market return = 17%
• Stock return = 14.2%

Substituting the values:

$14.2\% = 2.1\% + \beta(17\% - 2.1\%)$

$14.2\% = 2.1\% + \beta(14.9\%)$

$14.2\% - 2.1\% = \beta(14.9\%)$

$12.1\% = \beta(14.9\%)$

$\beta = \frac{12.1\%}{14.9\%} = 0.81$

The beta of 0.81 indicates that the stock is less volatile than the market, as a beta less than 1 suggests the stock moves less than the market._