Question

Stock A's stock has a beta of 1.30, and its required return is 13.75%. Stock B's beta is 0.80. If the risk-free rate is 2.75%, what is the required rate of return on B's stock? (Hint: First find the market risk premium.) Do not round your intermediate calculations

a) 9.52%
b) 9.33%
c) 8.57%
d) 11.33%
e) 10.66%

Answer 1

Answer:

9.52%

Step-by-step explanation:

Required rate = Risk free rate + Beta of stock × market risk premium

Hence for Stock A :

13.75% = 2.75% + 1.30 × market risk premium

0.1375 = 0.0275 + 1.30 × market risk premium

Market risk premium = $\frac{0.1375-0.0275)}{1.30}$

Rm = $\frac{0.11}{1.3}$

Rm = 0.084615

Market risk premium =  8.4615%

Hence for Stock B:

Required rate = 2.75% + 0.8 × 8.4615%

                       = 0.0275 + 0.8 × 0.084615

                       = 0.095192

                       = 9.52%

Option a) 9.52% is the answer.