Question

In: Finance

Assume that the risk-free rate is 6% and the market risk premium is 3%.

EXPECTED AND REQUIRED RATES OF RETURN

Assume that the risk-free rate is 6% and the market risk premium is 3%.

What is the required return for the overall stock market? Round your answer to two decimal places. %

What is the required rate of return on a stock with a beta of 0.8? Round your answer to two decimal places.

Solutions

Expert Solution

Using CAPM, Required rate = Risk free rate + Beta * Market risk premium

a)

Beta for market =1

Required rate on overall stock market = 6% + 1 * 3% = 9%

b)

Beta of stock = 0.8

Required rate on stock = 6% + 0.8* 3% = 8.40%

jeff jeffy answered 2 years ago
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