Stock A's stock has a beta of 1.30, and its required return is 14.75%. Stock B's...

Stock A's stock has a beta of 1.30, and its required return is 14.75%. Stock B's beta is 0.80. If the risk-free rate is 4.75%, what is the required rate of return on B's stock? (Hint: First find the market risk premium.)

Select the correct answer.

a. 10.86%

b. 10.88%

c. 10.90%

d. 10.92%

e. 10.94%

Solutions

Expert Solution

Required return=risk free rate+beta*(market rate-risk free rate)

14.75=4.75+1.3*(Market rate-4.75)

(14.75-4.75)=1.3*(Market rate-4.75)

Market rate=(14.75-4.75)/1.3+4.75

=12.4423077%

Hence required return for B=4.75+(12.4423077-4.75)*0.8

=10.90%(Approx)

jeff jeffy answered 1 year ago

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