If the Australian market risk premium is 5%, the Australian Treasury Notes 2.5% and the WOW stock has a beta of 1.08, according to the CAPM, (a) what is the expected return for this stock? (b) What is the market return? (c) According to WOW's beta how would you define this share?

Here,

Risk Premium (Rm-Rf) = 5%

Risk Free Rate of Return(Rf) = 2.5%

Beta(B) = 1.08

(a)

As per CAPM

Expexted Return(E.R) = Rf +B*(Rm-Rf)

=2.5 + 1.08*5

=7.9%

Expected Return = 7.9%

(b) Market Return (Rm)

E.R =Rf+ B*(Rm-Rf)

7.9=2.5+1.08*(Rm-2.5)

By solving above equation, we get

Rm=7.5%

(c)

Beta measures a stock's volatility, the degree to which its price fluctuates in relation to the overall stock market. In other words, it gives a sense of the stock's risk compared to that of the greater market's. Beta is used also to compare a stock's market risk to that of other stocks.

The value of any stock index, such as the Standard & Poor's 500 Index, moves up and down constantly. At the end of the trading day, we conclude that "the markets" were up or down. An investor considering buying a particular stock may want to know whether that stock moves up and down just as sharply as stocks in general. It may be inclined to hold its value on a bad day or get stuck in a rut when most stocks are rising.

A Basic guide to beta levels:

• Negative beta: A beta less than 0, which would indicate an inverse relation to the market, is possible but highly unlikely. Some investors argue that gold and gold stocks should have negative betas because they tend to do better when the stock market declines.
• Beta of 0: Basically, cash has a beta of 0. In other words, regardless of which way the market moves, the value of cash remains unchanged (given no inflation).
• Beta between 0 and 1: Companies that are less volatile than the market have a beta of less than 1 but more than 0. Many utility companies fall in this range.
• Beta of 1: A beta of 1 means a stock mirrors the volatility of whatever index is used to represent the overall market. If a stock has a beta of 1, it will move in the same direction as the index, by about the same amount. An index fund that mirrors the S&P 500 will have a beta close to 1.
• Beta greater than 1: This denotes a volatility that is greater than the broad-based index. Many new technology companies have a beta higher than 1.

Here the Beta of WOW Company is 1.08, that means that the Company's Share Price is a bit volatile & not much volatile as the Beta is Close to 1

The stock had a beta of 1.08, we would expect it to be 1.08times as volatile as the market.Therefore market return of 7.5% would mean an 8.1% gain for the company.