Portfolio management question

CFA Level I Portfolio Management
#1

Hi all

The question below is taken from the schweser practice exams vol 1 book. Exam 2 afternoon session.

Question: Greenbaum Inc stock pays no dividend and currently trades at $54. Based on CAPM and assuming an expected return on the market of 12% and a risk free rate of 8%, the expected price for Greenbaum one year from now is $62. The beta of Greenbaum shares is closest to :

Ans: Beta = 1.7

Can someone explain to me how to get this number? According to the solutions, the relevant section in Schweser is Study session 12 LOS 44e. But when I flipped to that sections, the formula I saw for Beta was :

Beta = Covariance (asset i , market) / Variance (market).

How do I link this to get the answer for the above question? Thanks ! Or is this equation even relevant?

Thanks!

#2

Expected Return on a stock based on CAPM = Rf + B(Rm - Rf)

You already know the expected return on the stock = (62 / 54)-1 = 14.8%

So,

.148 = .08 + B( .12 - .08)

.068 = B( .04)

B= 1.7

#3

easy…