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A stock has a required return of 10%, the risk-free rate is 4.5%, and the market...

A stock has a required return of 10%, the risk-free rate is 4.5%, and the market risk premium is 2%.

What is the stock's beta? Round your answer to two decimal places.
If the market risk premium increased to 6%, 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 equal to 1.0, then the change in required rate of return will be less 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 greater than the change in the market risk premium.
3. 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.
4. 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.
5. 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.
Stock's required rate of return will be ____ %.

Expert Solution

Beta of the Stock

As per capital asset pricing model (CAPM), the required rate of return is for the company is calculated by using the following formula

Required Rate of Return = Risk-free Rate + [Beta x Market Risk Premium]

Here, we’ve Required Rate of Return = 10.00%

Risk-free rate = 4.50%

Market Risk Premium = 2.00%

Therefore, the Required Rate of Return = Risk-free Rate + [Beta x Market Risk Premium]

10.00% = 4.50% + [Beta x 2.00%]

10.00% - 4.50% = [Beta x 2.00%]

5.50% = [Beta x 2.00%]

Beta = 5.50% / 2.00%

Beta = 2.75.

“Hence, the Stock’s Beta will be 2.75”

The new stock's required rate of return if the market risk premium increased to 6.00%

(II)-“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.”

New Stock’s Required Rate of Return = Risk-free Rate + [Beta x Market Risk Premium]

= 4.50% + [2.75 x 6.00%]

= 4.50% + 16.50%

= 21.00%

“Therefore, the new stock's required rate of return will be 21.00%”

jeff jeffy answered 1 month ago

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