A stock has a required return of 16%; the risk-free rate is 4%; and the market r
ID: 2779913 • Letter: A
Question
A stock has a required return of 16%; the risk-free rate is 4%; and the market risk premium is 6%.
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.
A. 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.
B. If the stock's beta is less than 1.0, then the change in required rate of return will be greater than the change in the market risk premium.
C. If the stock's beta is greater than 1.0, then the change in required rate of return will be less than the change in the market risk premium.
D. If the stock's beta is equal to 1.0, then the change in required rate of return will be greater than the change in the market risk premium.
E. If the stock's beta is equal to 1.0, then the change in required rate of return will be less than the change in the market risk premium.
____
New stock's required rate of return will be what _______ %. Round your answer to two decimal places.
Explanation / Answer
Using CAPM, E(R) = Rf + beta x MRP
=> 16% = 4% + beta x 6%
=> beta = 2.0
If MRP = 10%, then E(R) = 4% + 2 x 10% = 24%
Hence, A is correct.
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