Question

Thayer Farms stock has a beta of 1.38. The risk-free rate of return is 3.87 percent, the inflation rate is 3.93 percent, and the market risk premium is 9.03 percent. What is the expected rate of return on this stock?

Answer 1

Answer: 16.33%

Explanation:

With the details given, the best method of Calculating the expected rate of return is the Capital Asset Pricing Model (CAPM).

The formula is,

Er = Rf + b(Rm - Rf)

Where,

Er is expected return

Rf is the risk free rate

b is beta

Rm - Rf is the Market Premium

Er = 3.87% + 1.38(9.03)

= 3.87% + 12.4614%

= 16.33%

The model accounts for inflation by including the risk free rate which is already adjusted for inflation.