A few years ago, the Value Line Investment Survey reported the following market

Question

A few years ago, the Value Line Investment Survey reported the following market betas for the stocks of selected healthcare providers:


Company Beta
Quorum Health Group 0.90
Beverly Enterprises 1.20
HEALTHSOUTH Corporation 1.45
United Healthcare 1.70

At the time these betas were developed, reasonable estimates for the risk-free rate, RF, and the required rate of return on the market, R(Rm), were 6.5 percent and 13.5 percent, respectively.

a. What are the required rates of return on the four stocks?
b. Why do their required rates of return differ?
c. Suppose that a person is planning to invest in only one stock rather than hold a well-diversified stock portfolio. Are the required rates of return calculated above applicable to the investment? Explain your answer.

Explanation / Answer

a) The formula is ke = Rf + B(Rm- Rf) 1) .065 + .9 (.135 - .065) = 12.8 % 2) 14.9 % 3) 16.65 % 4) 18.4 % b) due to different beta as in finance, the Beta (ß) of a stock or portfolio is a number describing the correlation of its returns with those of the financial market as a whole c) Yes they are applicable to the investment. They can be used as a guideline to invest in the portfolio.

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