The beta coefficient for Stock C is bC = 0.2, and that for Stock D is bD = - 0.6

Question

The beta coefficient for Stock C is bC = 0.2, and that for Stock D is bD = - 0.6. (Stock D's beta is negative, indicating that its rate of return rises whenever returns on most other stocks fall. There are very few negative-beta stocks, although collection agency and gold mining stocks are sometimes cited as examples.)

If the risk-free rate is 9%and the expected rate of return on an average stock is 12%, what are the required rates of return on Stocks C and D? Round the answers to two decimal places.

Explanation / Answer

ACCORDING TO CAPM

RE = RF +(RM-RF)Be

RE OF STOCK

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