To calculate the expected return of the stock, we use the Capital Asset Pricing Model (CAPM) formula:

$E(R_i) = R_f + \beta \cdot [E(R_m) - R_f]$

Where:

• $E(R_i)$ = Expected return of the stock.
• $R_f$ = Risk-free rate.
• $\beta$ = Beta of the stock.
• $[E(R_m) - R_f]$ = Market risk premium (reward-to-risk ratio in this case).

Given:

• $\beta = 1.28$,
• $R_f = 4.3\%$ or $0.043$,
• Reward-to-risk ratio = $5.89\%$ or $0.0589$.

Step 1: Calculate Expected Return

The reward-to-risk ratio is equivalent to $[E(R_m) - R_f]$. Substituting the values into the CAPM equation:

$E(R_i) = 0.043 + 1.28 \cdot 0.0589$

$E(R_i) = 0.043 + 0.075392$

$E(R_i) = 0.118392 \, \text{or } 11.84\%.$

Final Answer:

11.84%

Let me know if you'd like a detailed explanation or further assistance!

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Follow-Up Questions:

1. How is beta used to measure a stock's risk compared to the market?
2. Why is the risk-free rate important in the CAPM formula?
3. What does the reward-to-risk ratio signify in portfolio theory?
4. How does the CAPM help in deciding between different investment opportunities?
5. What are the limitations of the CAPM in real-world applications?

Tip:

When working with percentages in financial equations, convert them to decimals (e.g., 5% = 0.05) for easier calculations!