MCQ Questions What is the required rate of return for a stock with a beta of 1.2
ID: 2645027 • Letter: M
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MCQ Questions
What is the required rate of return for a stock with a beta of 1.2, when the risk-free rate is 6% and the expected market return is 12%? What is the required rate of return for a stock with a beta of .70: when the risk-free rate is 7% and the market is offering 14%? The risk- free rate is 6% and the expected market return is 15%. An investor sees a stock with a beta of 1.20 selling for $25. The investor thinks that the stock will sell for $31 at year end. The stock is so the investor should:Explanation / Answer
1) Beta = 1.2
Risk free rate = 6%
MArket Return = 12%
Required Rate of Return for a stock = Beta of Stock x(MArket return - Risk free rate of return) + Risk free rate of return
Required Rate of Return = 1.2x(12%-6%) +6%
Required RAte of return = 1.2x(.06)+.06 = 0. 132 or 13.2%
2) Beta = .70
Risk free rate = 7%
Market rate of return = 14%
Required Rate of Return for a stock = Beta of Stock x(MArket return - Risk free rate of return) + Risk free rate of return
Required Rate of Return = .70x(14%-7%)+7%
Required Rate of Return = 0.70x(.07)+.07 = 0.119 or 11.9%
3) The Stock is Overpriced , Short it.
4) Beta of Stock = Expected Return on stock - Risk free rate / MArket rate of Return - Risk Free rate
Beta of Stock = (17.40% - 7%) / (15%-7%)
Beta of Stock = 10.40%/8% = 1.30
5) Stock Beta = Covariance of MArket return with stock Return/ Variance of Market Return
Stock Beta = 0.005/(.05)^2
Stock beta = 0.005/0.0025 = 2
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