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Question:

Greenbaum, Inc. stock pays no dividend and currently trades at $54. Based on the CAPM and assuming an expected return on the market of 12% and a risk-free rate of 8%, the expected price for Greenbaum one year from now is $62. The beta of Greenbaum shares is closest to:

A 1.7.
explanation

Greenbaums expected return for the coming year is (62 / 54) — 1 = 14.8%. Its risk premium relative to the risk-free rate is 14.8% - 8.0% = 6.8%. The market risk premium is 12% - 8% = 4%. Therefore, the beta of Greenbaum must be 6.8 / 4.0 = 1.7.

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