A stock has a required return of 16.00%, the risk-free rate is 8.20%, and the market...

A stock has a required return of 16.00%, the risk-free rate is 8.20%, and the market risk premium is 12.20%.
a) What is the stock's beta?
b) If the market risk premium changes to 5.50%, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged.

Expert Solution

a) Required return = Risk-free rate + Beta(Market risk premium)

0.1600 = 0.0820 + Beta(0.1220)

Beta = (0.1600 - 0.0820) / 0.1220

Beta = 0.64

b) Required return = Risk-free rate + Beta(Market risk premium)

Required return = 0.0820 + 0.64(0.0550)

Required return = 0.1172 or 11.72%

jeff jeffy answered 2 years ago

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