To calculate the stock's expected return, we can use the Capital Asset Pricing Model (CAPM), which is given by:

$E(R) = R_f + \beta \times [E(R_m) - R_f]$

Here:

• $E(R)$ is the expected return of the stock.
• $R_f$ is the risk-free rate.
• $\beta$ is the beta of the stock.
• $E(R_m) - R_f$ is the market risk premium.

We are given:

• $\beta = 0.91$
• $R_f = 2.7\% = 0.027$
• The reward-to-risk ratio is the slope of the Security Market Line (SML), which equals the market risk premium: $[E(R_m) - R_f]$. This is given as $5.93\% = 0.0593$.

Now substitute the values into the CAPM formula:

$E(R) = 0.027 + 0.91 \times 0.0593$

Calculate:

$E(R) = 0.027 + 0.053963$

$E(R) = 0.080963 \text{ or } 8.10\%$

Final Answer:

8.10%

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Would you like more details or have any questions?

Related Questions:

1. How is the beta value of a stock determined in practice?
2. What does the reward-to-risk ratio signify in the context of CAPM?
3. How does the risk-free rate affect the expected return of a stock?
4. What happens to the expected return if the beta of the stock changes?
5. How can investors use CAPM to make portfolio decisions?

Tip: The risk-free rate is usually derived from long-term government bonds, such as 10-year Treasury notes, to reflect stability over time.