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A stock has a beta of 0.75. The risk-free rate is 9%, and the market risk premium is 8%. What is the stock’s required rate of return?

REQUIRED RATE OF RETURN 

A stock has a beta of 0.75. The risk-free rate is 9%, and the market risk premium is 8%. What is the stock’s required rate of return?

Solutions

Expert Solution

Required Ret = Rf + Beta ( Rm - Rf )

Rf = Risk free ret
Rm = Market ret
Rm - Rf = Risk Premium
Beta = Systematic Risk

Particulars Amount
Risk Free Rate 9.0%
Market Return 17.0%
Beta                  0.7500
Risk Premium ( Rm - Rf) 8.00%

Beta Specifies Systematic Risk. Systematic risk specifies the How many times security return will deviate to market changes. SML return considers the risk premium for Systematic risk alone.Where as CML return considers risk premium for Total risk. Beta of market is "1".

SML Return = Rf + Beta ( Rm - Rf )
= 9 % + 0.75 ( 8 % )
= 9 % + ( 6 % )
= 15 %

Rf = Risk Free rate

jeff jeffy answered 2 years ago
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