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The beta of Ricci Co.'s stock is 3.2, whereas the risk-free rate of return is 9 percent. If the expected return on the market is 18 percent, then what should investors expect as a return on on Ricci Co.?

Respuesta :

Zviko

Answer:

Investors expect a return of 37.80 %.

Explanation:

The return that investors expect is the cost of equity to Ricci Co.

Cost of Equity = Return on Risk Free Security + Beta × Risk Premium

Where,

Risk Premium = Return on Market Portfolio - Return on Risk Free Security

                        = 18.00% - 9.00%

                        = 9.00 %

Cost of Equity = 9.00% + 3.2 × 9.00 %

                       =  37.80 %

     

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