Required Rate of Return Stock R has a beta of 1.8, Stock S has a beta of 0.80, t
ID: 2744786 • Letter: R
Question
Required Rate of Return
Stock R has a beta of 1.8, Stock S has a beta of 0.80, the expected rate of return on an average stock is 11%, and the risk-free rate is 6%. By how much does the required return on the riskier stock exceed that on the less risky stock? Round your answer to two decimal places.
Required Rate of Return
uppose rRF = 6%, rM = 11%, and rA = 14%.
a. Calculate Stock A's beta. Round your answer to two decimal places.
b. If Stock A's beta were 1.8, then what would be A's new required rate of return? Round your answer to two decimal places.
Required Rate of Return
Stock R has a beta of 1.8, Stock S has a beta of 0.80, the expected rate of return on an average stock is 11%, and the risk-free rate is 6%. By how much does the required return on the riskier stock exceed that on the less risky stock? Round your answer to two decimal places.
Explanation / Answer
Answer: Use CAPM:
E(r) = RFR + ß(Rmkt - RFR),
where (Rmkt - RFR) = the market risk premium
0.11 = 0.06 + 1.0(market risk premium)
0.05 = Market risk premium
E(rR)=0.06+1.8*0.05
=0.15 or 15%
E(rS)=0.06+0.80*0.05
=0.10 or 10%
The required return on the riskier stock exceed that on the less risky stock:
=15%-10%
=5%
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