Consider the single-index model. The alpha of a stock is 0%. The return on the market index is 16%. The risk-free rate of return is 5%. The stock earns a return that exceeds the risk-free rate by 11%, and there are no firm-specific events affecting the stock performance. The β of the stock is

β of the stock = 1

Explanation:

Given:

α of a stock = 0%

Return on the market index = 16%

Risk-free rate of return  = 5%

Required rate  = 11% + 5% = 16%

β of the stock = ?

Computation of β of the stock:

Required rate = Risk-free rate of return + [β (Return on the market index - Risk-free rate of return)]

16% = 5% + [β (16% - 5%)]

16% - 5% = β (16% - 5%)

11% = [β (16% - 5%)

11% = [β (11%)

β of the stock = 1