I'm going to assume that you mean the risk free rate is 4%, or 0.04, and the market rate of return is 14%, or .14. If that is the case, then we solve:
Market Rate of Return = (Risk Free Rate) + Beta * (Market Risk Premium)
0.14 = 0.04 + 1.2 * MRP
0.1 = 1.2 * MRP
0.1 / 1.2 = MRP
0.08333... = MRP
The Market Risk Premium would be approximately 8.33%
This is an example of the Capital Asset Pricing Model, or CAPM.
49%....in reality no stock has a beta of 7
Require Rate of Return is formulated as: Riskfree Rate + Beta(Risk Premium) Required Rate of Return = 4.25 + 1.4 (5.50) = 11.95%
4.5 + 5.00= 9.5 9.5 X 1.2= 11.4
RoR = Rf + beta x Rp where, RoR = Required Rate of return Rf = Risk free Rate Rp = Risk Premium so Ror - 19%
E (return) = Rf + Beta[Rm - Rf] = 6 + (7) (13-6) = 55 %
Expected return= risk free rate + Risk premium = 11 rate of return on stock= Riskfree rate + beta x( expected market return- risk free rate)
49%....in reality no stock has a beta of 7
2.0%
11.51%
The beta is the relationship of a stock's expected return to the broad market's return. A "high beta" stock will have a beta over 1.00, and thus move up more than the market when the market is advancing, and decline more than the market when the market is declining. A "low beta" stock will decline less than the market, or advance less than the market, depending. The problem with beta is that it assumes a linear relationship, and what you describe here clearly is not. Your stock falls when the market rises a little, and rises more than the market when the market is advancing. To calculate beta, you should look at a longer term analysis of your stock and the market -- say, weekly observations over a year. Most betas are calculated using this length of data. But check formulas -- many different ones are out there. Also remember that beta is only one measure of a stock's performance. Alpha is the performance of a stock that cannot be explained by its beta and the broad market movement. And of course, all of this is a "hypothesis" of market behavior which is useful in understanding broad actions, but very weak in predicting individual stock behavior.
the beta is 1 the beta is 1
Beta risk arrived through regression technique (regressing stock return and market return) is the key data used to arrive at the cost of equity using CAPM model. The risk premium is calculated using Beta, and risk free return is added to it in order to arrive at cost of equity.
Require Rate of Return is formulated as: Riskfree Rate + Beta(Risk Premium) Required Rate of Return = 4.25 + 1.4 (5.50) = 11.95%
You can use Beta to measure market volatility because of beta is the elasticity of a stock change as a result of a change in the market. That is, Beta of a sotck is found by comparing the senstivity of a stock's return to the fluctuations in the market.Beta is found by dividing the product of the covwariances of the stock and market retun by the variance of the market.The bench marks of betas are as followed:a risk free investment such as a Tbill (that is guaranteed a return) will have a beta of 0.A portfolio with risk equivalent to the market has a beta of 1.Given those two bench mark, you can gauge at the volatility of the stock/investment by comparing its beta with those two extremes.
4.5 + 5.00= 9.5 9.5 X 1.2= 11.4
RoR = Rf + beta x Rp where, RoR = Required Rate of return Rf = Risk free Rate Rp = Risk Premium so Ror - 19%
E (return) = Rf + Beta[Rm - Rf] = 6 + (7) (13-6) = 55 %