A. Compute the expected rate of return for Acer common stock, which has a 1.5 beta. The risk-free rate is 4.5 percent and the market portfolio (composed of New York Stock Exchange stocks) has an expected return of 10 percent. b. Why is the rate you computed the expected rate?

(a) 12.75%

Explanation:

Given that,

Beta = 1.5

Risk-free rate = 4.5 percent

Expected return on market portfolio = 10 percent

Here, we are using CAPM:

(a) Expected rate of return for Acer common stock:

= Risk free rate + beta (Expected return on market Portfolio - Risk free rate)

= 4.5% + [1.5 (10% - 4.5%)]

= 0.045 + (1.5 × 0.055)

= 0.045 + 0.0825

= 0.1275 or 12.75%

(b) This rate is known as the fair rate which compensates the holder or investor for assuming the risk associated with it and for the time value of money.

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