Question

For a risk-free return rate of 5%, a market risk premium of 6%, what is the required rate of return for a security with a beta coefficient of 1. 5? 5% 9% 14% cannot be determined -Select- 2. Changing the risk-free return (inflation) Changes neither the y-intercept nor the slope of the security market line Changes only the y-intercept of the security market line Changes only the slope of the security market line Changes both the y-intercept and the slope of the security market line -Select- 3. Changing the market risk premium Changes neither the y-intercept nor the slope of the security market line Changes only the y-intercept of the security market line Changes only the slope of the security market line Changes both the y-intercept and the slope of the security market line -Select- 4. True or False: If a company's beta doubles, its required return doubles. True False

Answer 1

The required rate of return for a security with a beta coefficient of 1. 5 is 14%.

Changing the risk-free return (inflation) changes only the y-intercept of the security market line.

Changing the market risk premium changes only the slope of the security market line.

When the beta of a stock doubles, the required return does not double.

What is the required return?

The required return can be determined using the capm.

According to CAPM:

Required return = risk free + (beta x market premium)

5% + 1.5(6) = 14%

What is the change in required return when beta doubles?

Assume the beta of the above stock doubles, requried retrun becomes:

5% + (3 x 6) = 23%

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