Question

Required Rate of Return Suppose rRF = 5%, rM = 10%, and rA = 12%. Calculate Stock A's beta. Round your answer to one decimal place. 1.4

If Stock A's beta were 2.1, then what would be A's new required rate of return? Round your answer to one decimal place. ? %

Answer 1

1.The required return on the stock is calculated using the Capital Asset Pricing Model (CAPM)

The formula is given below:

Ke=Rf+b[E(Rm)-Rf]

Where:

Rf= risk-free rate of return

Rm= expected rate of return on the market.

b= Stock’s beta

12% = 5% + b*(10% - 5% )

b*5%= 12% - 5%

beta = 7% / 5%

= 1.4.

2.The required return on the stock is calculated using the Capital Asset Pricing Model (CAPM)

The formula is given below:

Ke=Rf+b[E(Rm)-Rf]

Where:

Rf= risk-free rate of return

Rm= expected rate of return on the market.

b= Stock’s beta

Ke= 4% + 2.1*(10% - 5% )

= 4% + 10.50%

= 14.5%.