Question

Stock A's stock has a beta of 1.30, and its required return is 12.00%. 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.)a. 8.76%b. 8.98%c. 9.21%d. 9.44%e. 9.68%

Answer 1

Answer:

c. 9.21%

Explanation:

In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below

Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)

For stock A

12% = 4.75% + 1.30 × market risk premium

12% - 4.75% = 1.30 × market risk premium

7.25% =  1.30 × market risk premium

So, the market risk premium = 5.58%

For Stock B, required rate of return would be

= 4.75% + 0.80 × 5.58%

= 4.75% + 4.464%

= 9.214%