Answer:
Expected rate of return on stock= 10.99%
Explanation:
The expected rate of return E(r) can be determined using the capital assets pricing model (CAPM)
The CAPM is expressed below:
Under CAPM,
E(r)= Rf + β(Rm-Rf)
Rf-risk-free rate (treasury bill rate), β= Beta, Rm= Return on market.
Using this model,
Rf- 3.87%, β- 1.38, Rm- 9.03%
Ke= 3.87% + 1.38×(9.03-3.87)%
= 10.9908
Expected rate of return on stock= 10.99%
