A stock has a beta of 1.12, the expected return on the market is 10 percent, and the risk-free rate is 3 percent. What must the expected return on this stock be

The expected return on this stock will be 10.84 %.

Explanation:

The return that is expected from this stock is the cost to the company. The equity cost of the company can the calculated using the Capital Asset Pricing Model.

The Capital Asset Pricing Model calculate the expected return on an equity stock by adding a market premium on the return that is provided by the government bond or risk free stock.

Cost of Equity Stock = Risk Free Rate + Company`s Beta × Risk Premium

                                  = 0.03 + 1.12 × (0.10 - 0.03)

                                  = 0.1084 or 10.84 %

Conclusion :

The expected return on this stock will be 10.84 %.

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