Assume that the risk-free rate is 2.5% and the required return on the market is 10%....

Assume that the risk-free rate is 2.5% and the required return on the market is 10%. What is the required rate of return on a stock with a beta of 2.1? Round your answer to two decimal places.

Expert Solution

The required return 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.

Rm-Rf= Market risk premium

b= Stock’s beta

Ke= 2.5% + 2.1*(10% - 2.5%)

= 2.5% + 15.75%

= 18.25%.

jeff jeffy answered 2 years ago

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