Company A has a beta of 0.70, while Company B's beta is 1.10. The required return...

Company A has a beta of 0.70, while Company B's beta is 1.10. The required return on the stock market is 11.00%, and the risk-free rate is 4.25%. What is the difference between A's and B's required rates of return? (Hint: First find the market risk premium, then find the required returns on the stocks.) Select the correct answer.

a. 2.50%

b. 2.55%

c. 2.60%

d. 2.65%

e. 2.70%

Expert Solution

Required return on stock = Risk free rate + Beta * (Market return - Risk free rate)

Stock A required return = 0.0425 + 0.70 * (0.11 - 0.0425)

= 8.975%

Stock B required return = 0.0425 + 1.10*(0.11 - 0.0425)

= 11.675%

Difference in stock required return = 11.675% - 8.975%

= 2.70%

Correct choice E

jeff jeffy answered 2 years ago

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