The stock of Hammond corp has a covariance with the market return of 0.031%. The

Question

The stock of Hammond corp has a covariance with the market return of 0.031%. The variance of the market return is 0.041%. The estimated risk free rate is 4% and the estimated market rate of return is 10%. The estimated required return on Hammond's stock is________________%. ??? The stock of Hammond corp has a covariance with the market return of 0.031%. The variance of the market return is 0.041%. The estimated risk free rate is 4% and the estimated market rate of return is 10%. The estimated required return on Hammond's stock is________________%. ??? The stock of Hammond corp has a covariance with the market return of 0.031%. The variance of the market return is 0.041%. The estimated risk free rate is 4% and the estimated market rate of return is 10%. The estimated required return on Hammond's stock is________________%. ???

Explanation / Answer

Use CAPM (capital asset pricing model) to calculate the estimated required return = = 8.54%

r = Risk Free Rate + Beta*(Market Risk Premium)

Beta = Cov. stock and market/variance of market

= 0.00031/0.00041 = 0.76

Market Risk Premium = 10% - 4% = 6%

r = 0.04 + (0.76*.06)

= 8.54%

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