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Suppose that Ford’s stock volatility (i.e. standard deviation) is 40% while the market volatility is 20%. If the correlation between Ford and the market is 0.8, what is the expected return on Ford’s stock? Assume that the expected return on the market is 12% and the risk-free rate is 4%.

Respuesta :

Answer:

16.8%

Explanation:

The computation of expected return on Ford’s stock is given below:-

Beta = correlation × Standard deviation of stock ÷ Standard deviation of Market

= 0.8 × 40% ÷ 20%

= 1.60

Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)

= 4% + 1.60 × (12% - 4%)

= 4% + 1.60 × (0.12 -0.04)

= 4% + 1.60 × 0.08

= 4% + 0.128

= 0.04 + 0.128

= 0.168

= 16.8%

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