Answer:
12.6%
Explanation:
Using the Capital Market Pricing Model (CAPM) to compute the expected rate of return on Dee's Fashion stock.
Expected rate of return = [tex]R_{f} +\beta (R_{m} -R_{f} )[/tex]
Where R(f) = risk free rate of return, or market return less risk premium = 12.6% - 8.7% = 3.9%
[tex]\beta[/tex] = the risk of the stock relative to the market risk. In this case, beta = 1, since the company is equally as risky as the market (as noted in the question)
R(m) = return of the stock market = 12.6%
Therefore, the expected rate of return on the stock
= 3.9% + 1 * (12.6% - 3.9%)
= 3.9% + 8.7%
= 12.6%.
The return is the same as the stock market return because the stock is equally as risky as the market.
