The expected return on the stock is given by:

$r_f + \beta(r_m - r_f)$

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

$\Rightarrow \beta = 0.81$

Things to Remember

• Beta measures the sensitivity of a stock's returns to the market returns.
• A beta of 1 indicates that the stock's price will move with the market.
• A beta greater than 1 indicates the stock is more volatile than the market.
• A beta less than 1 indicates the stock is less volatile than the market.
• The risk-free rate is the return on an investment with zero risk, typically represented by government bonds.
• The expected return on a stock can be calculated using the Capital Asset Pricing Model (CAPM).