Partridge Plastic's stock has an estimated beta of 1.2, and its required rate of return is...

Partridge Plastic's stock has an estimated beta of 1.2, and its required rate of return is 10.1 percent. Cleaver Motors' stock has a beta of 1.3, and the risk - free rate is 4.7 percent. What is the required rate of return on Cleaver Motors' stock? [HINT: First, use Partridge’s information to find the Market Risk Premium. Then use that MRP to figure the required rate of return on Cleaver. Express your answer as a decimal, with at least four digits to the right of the decimal! (0.1234)]

Expert Solution

Required return=risk free rate+beta*(market rate-risk free rate)

Partridge Plastic's stock:

10.1=4.7+1.2*(Market rate-4.7)

(10.1-4.7)=1.2*(Market rate-4.7)

Market rate=(10.1-4.7)/1.2+4.7

=9.2%

Hence required return for Cleaver Motors' stock=4.7+(9.2-4.7)*1.3

=0.1055

jeff jeffy answered 2 years ago

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