The common stock of Jensen Shipping has an expected return of 14.7 percent. The return on the market is 10.8 percent and the risk-free rate of return is 3.8 percent. What is the beta of this stock

Beta = 1.009

Explanation:

The capital asset pricing model is a risk-based model for estimating the return on  a stock.. Here, the return on equity is dependent on the level of reaction of the the equity to changes in the return on a market portfolio. These changes are captured as systematic risk. Systematic risks are those which affect all economic actors in the market, they include factors like changes in interest rate, inflation, etc. The magnitude by which a stock is affected by systematic risk is measured by beta.

Under CAPM,

E(r)= Rf + β(Rm-Rf)

E(r)- expected return, Rf-risk-free rate , β= Beta, Rm= Return on market.

Using this model, we can work out the value of beta as follows:

Ke= 14.7%., Rf- 3.8%, Rm = 10.8%

14.7 = 3.8  + (β× 10.8)

14.7 = 3.8 + 10.8β

14.7- 3.8 = 10.8β

divide both sides by 10.8

(14.7-3.8)/10.8 =β

1.009 = β

Beta = 1.009

β = 1.56

Explanation:

The CAPM model is appropriate to use on the basis of systematic risk of stock returns as it is a measure of this risk

The Capital Asset Pricing Model

ER = rf + β (rm - rf)

Given

rf = 3.8%

rm = 10.8%

ER = 14.7%

put the values in formula and solve

14.7 = 3.8% + β  (10.8-3.8)

14.7- 3.8 =β(7)

10.9 =β(7) divide by 7 on both sides of the equation

β = 10.9/7 =1.5571/1.56

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