Please help with return rate calculation

[dnorr]

If the beta of ABC Company is 1.2 and the market return is expected to be 13%
with a risk-free return of 3%, then the expected return of ABC is 15%, as follows:
We begin with the risk-free rate and then multiply the expected return in excess
of that rate by the stock’s beta.
3% + 1.2(13% – 3%) = 3% + 1.2(10%) = 3% + 12% = 15%

How do we get 3% in each of these instances? Do we add 3 + 1.2 x 10% and how do we derive at 12%. Thanks.

 

[JeffM]

If the beta of ABC Company is 1.2 and the market return is expected to be 13%
with a risk-free return of 3%, then the expected return of ABC is 15%, as follows:
We begin with the risk-free rate and then multiply the expected return in excess
of that rate by the stock’s beta.
3% + 1.2(13% – 3%) = 3% + 1.2(10%) = 3% + 12% = 15%

How do we get 3% in each of these instances? Do we add 3 + 1.2 x 10% and how do we derive at 12%. Thanks.

It is the same 3%, namely the given current risk-free rate of interest.
The formula given above is i + b(m - i), where
i = the current risk-free rate of interest,
m = the expected market rate of return for equities, and
b = the individual stock's expected beta.

I have no idea what you mean to ask when you ask how do we derive at 12%. 1.2 * 10% = 12%, but you CAN'T be asking about that!