A stock has a required return of 8%, the risk-free rate is 3%, and the market...

A stock has a required return of 8%, the risk-free rate is 3%, 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 8%, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged. Do not round intermediate calculations. Round your answer to two decimal places.
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
-Select - ____?

New stock's required rate of return will be ____%.

Solutions

Expert Solution

let me know if you need any clarification..

Ans a)

Computation of stock Beta

we know that required return = risk free rate + market risk premium*beta

therefore Beta = (required return-risk free rate)/Market risk premium

Beta =

=(8%-3%)/3%

Beta=

1.67

Ans b)

Correct answer is option : V

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

Ans c)

New stock's required rate of return will be

new stock required rate = 3%+8%*1.67

16.33%

jeff jeffy answered 1 month ago

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