A stock has a required return of 15%; the risk-free rate is 4%; and the market r

ID: 446191 • Letter: A

Question

A stock has a required return of 15%; the risk-free rate is 4%; and the market risk premium is 4%.

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

If the market risk premium increased to 8%, what would happen to the stock's required rate of return? Assume the risk-free rate and the beta remain unchanged.

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.

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.

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.

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.

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.

-Select-IIIIIIIVVItem 2 {C}

New stock's required rate of return will be

%. Round your answer to two decimal places.

ANSWER FULLY

Explanation / Answer

The following values have been calculated using the TDIST and TINV functions in Excel. These values come from a t distribution with 15 degrees of freedom.

These values represent the probability to the right of the given positive values.

Value

t probability

1.00

0.1636

1.20

0.1209

1.40

0.0872

These values represent the t value for a given probability.

Probability

t value

0.20

1.3178

0.10

1.7109

0.05

2.0639