Question

In: Finance

A stock has a required return of 12%; the risk-free rate is 4%; and the market...

A stock has a required return of 12%; the risk-free rate is 4%; and the market risk premium is 5%. What is the stock's beta? Round your answer to two decimal places. If the market risk premium increased to 7%, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged. If the stock's beta is greater than 1.0, then the change in required rate of return will be less than the change in the market risk premium. If the stock's beta is equal to 1.0, then the change in required rate of return will be greater than the change in the market risk premium. If the stock's beta is equal to 1.0, then the change in required rate of return will be less than the change in the market risk premium. If the stock's beta is greater than 1.0, then the change in required rate of return will be greater than the change in the market risk premium. If the stock's beta is less than 1.0, then the change in required rate of return will be greater than the change in the market risk premium. -Select- New stock's required rate of return will be %. Round your answer to two decimal places.

Expert Solution

Part A:

Beta = [ Expected Ret - Risk Free Rate ] / Risk Premium

= [ 12% - 4% ] / 5%

= 8% / 5%

= 1.60

Part B:

Expected Ret = Rf + Beta ( Market Risk Premium )

= 4% + 1.60 ( 7% )

= 4% + 11.2%

= 15.2%

Part C:

Expected Ret = Rf + Beta ( Market Risk Premium )

If Beta >1, Change in Required Ret will be more than Cahnge in Risk Premium

If Beta = 1, Change in Required Ret will be equal to Cahnge in Risk Premium

If Beta <1, Change in Required Ret will be less than Cahnge in Risk Premium

Option D ( 4th option is correct )

If the stock's beta is greater than 1.0, then the change in required rate of return will be greater than the change in the market risk premium. is correct.

jeff jeffy answered 2 years ago

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