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.