Question
In: Finance
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.
- 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.
- 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% | |||||||||||||
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