5. Beta and required rate of return A stock has a required return of 15%; the ri

Question

5. Beta and required rate of return A stock has a required return of 15%; the risk-free rate is 6%; and the market risk premium is 3%.

What is the stock's beta? Round your answer to two decimal places.

If the market risk premium increased to 10%, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged. Answetr: If the stock's beta is greater than 1.0, then the change in required rate of return will be greater than the change in the market risk premium.

New stock's required rate of return will be ___%. Round your answer to two decimal places.

Explanation / Answer

Required Return = Rf + Beta (Rm- Rf)

15% =6% +Beta (3%)

Beta (3%) = 9%

Beta = 3

If the market risk premium increased to 10%, what would happen to the stock's required rate of return?

Required Return = Rf + Beta (Rm- Rf)

=6% +3 (10%)

= 36%

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