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An entity has a stock that has a beta of 1.20 when the risk free rate is 5% in 2010. The average return on the market in 2010 was 12%. In 2011 the risk free rate increased by 1% due to inflation, but the return on the market increased by 2%.
However, in 2012 the rate of inflation slowed and the risk free rate and the market return were the same as in 2011. In the year 2013, the return on the market decreased to 14% and the risk free rate to 7%, beta was increased to 1.50.
Required:
a. Calculate the yearly return on the stock using CAPM
b. Calculate the average return on the stock
c. Calculate the standard deviation of the returns
Business risk
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