Stock R has a beta of 2.1, Stock S has a beta of 0.60, the expected rate of retu

Question

Stock R has a beta of 2.1, Stock S has a beta of 0.60, the expected rate of return on an average stock is 9%, and the risk-free rate is 5%. By how much does the required return on the riskier stock exceed the required return on the riskier stock exceed that on the less risky stock? Stock R has a beta of 2.1, Stock S has a beta of 0.60, the expected rate of return on an average stock is 9%, and the risk-free rate is 5%. By how much does the required return on the riskier stock exceed the required return on the riskier stock exceed that on the less risky stock?

Explanation / Answer

rR=rF+B(rM-rF)

rR=5+2.1(9-5) =13.4%

rR=rF+B(rM-rF)

rS=5+.6(9-5)=7.4

Rate of return of Stock R exceeds by return of stock S i.e less rislier by (13.4-7.4)=6%

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