We can solve this problem using the Capital Asset Pricing Model (CAPM) formula, which relates the expected return of a stock to its beta and the market's expected return:

$R_i = R_f + \beta_i \times (R_m - R_f)$

Where:

• $R_i$ is the expected return on the stock.
• $R_f$ is the risk-free rate.
• $\beta_i$ is the beta of the stock (which measures the stock's sensitivity to market movements).
• $R_m$ is the market return.

Now, in this case, we are told that the market return will be 6 percentage points below expectations, meaning the actual market return ($R_m$) will be:

$R_m - 6\%$

Given the stock's beta of 1.8, this means that for every percentage point the market return changes, the stock return should change by $1.8 \times \text{market change}$.

Step-by-step solution:

1. The change in market return is $-6\%$.
2. The stock's return will adjust by $1.8 \times (-6\%) = -10.8\%$.
3. The expected rate of return for the stock was initially 16%. Since the market return is worse than expected, we subtract the 10.8% adjustment: $\text{New stock return} = 16\% - 10.8\% = 5.2\%$

Thus, your best guess for the rate of return on the stock is 5.2%.

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Would you like any further clarification or details on this?

Here are 5 questions related to this topic:

1. How does beta affect a stock’s risk level compared to the market?
2. What would happen to the stock's return if the market exceeded expectations?
3. How does the risk-free rate influence the CAPM formula?
4. Can a stock have a negative beta, and what would that imply?
5. How would changing the market’s expected return impact the stock's performance?

Tip: A beta above 1 means the stock is more volatile than the market, while a beta below 1 indicates less volatility.