Assume that the risk-free rate is 3.5% and the market risk premium is 3%. What is...

Assume that the risk-free rate is 3.5% 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 1.9? Round your answer to two decimal places. %

Solutions

Expert Solution

a) Calculation of the required rate of return of the overall stock market:

Formula,

Required rate of return = Risk free rate + Beta x Market risk premium

Note: Beta of the overall market is alway 1.

So, Required rate of return of the overall marlet will be = 3.50% + 1 x 3%

= 3.50% + 3%

= 6.50% (Answer)

b) Required rate of return of a stock with beta 1.90 = 3.50% + 1.90 x3%

= 3.50% + 5.70%

= 9.20% (Answer)

jeff jeffy answered 2 years ago

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