You have been given an opportunity to invest in a stock. Recent trends suggest that a one percent rise in the stock market leads to approximately a two and one-half percent rise in the price of this stock
The real risk-free rate currently stands at 6% and stocks on average have provided 12% returns. Using the capital asset pricing model, determine the appropriate discount rate for the stock in question.
Discount rate = rf + β(rm - rf)
β = 2.5
R = 6 + 2.5(12 – 6 )
R = 6 + 15
= 21%
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