Stock A has a beta of 1.5, the risk-free rate is 4% and the return on...

Stock A has a beta of 1.5, the risk-free rate is 4% and the return on the market is 9%. If inflation changes by -2%, by how much will the required return on Stock A change?

Solutions

Expert Solution

Beta = 1.5

Risk-free rate = 4%

Market return = 9%

The required return on Stock A before change in inflation

The risk free rate decreases by 2% with decrease in inflation rate by 2%

The new risk-free rate = 4% -2% = 2%

The required return on Stock A after the change in inflation

The required return on Stock A increases by 12.5% - 11.5% = 1%

jeff jeffy answered 1 year ago

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