Beta and required rate of return A stock has a required return of 15%; the risk-
ID: 2779934 • Letter: B
Question
Beta and required rate of return
A stock has a required return of 15%; the risk-free rate is 3.5%; and the market risk premium is 5%.
What is the stock's beta? Round your answer to two decimal places.
If the stock's beta is greater than 1.0, then the change in required rate of return will be greater than the change in the market risk premium.
If the stock's beta is less than 1.0, then the change in required rate of return will be greater than the change in the market risk premium.
If the stock's beta is greater than 1.0, then the change in required rate of return will be less than the change in the market risk premium.
If the stock's beta is equal to 1.0, then the change in required rate of return will be greater than the change in the market risk premium.
If the stock's beta is equal to 1.0, then the change in required rate of return will be less than the change in the market risk premium.
Beta and required rate of return
A stock has a required return of 15%; the risk-free rate is 3.5%; and the market risk premium is 5%.
What is the stock's beta? Round your answer to two decimal places.
If the stock's beta is greater than 1.0, then the change in required rate of return will be greater than the change in the market risk premium.
If the stock's beta is less than 1.0, then the change in required rate of return will be greater than the change in the market risk premium.
If the stock's beta is greater than 1.0, then the change in required rate of return will be less than the change in the market risk premium.
If the stock's beta is equal to 1.0, then the change in required rate of return will be greater than the change in the market risk premium.
If the stock's beta is equal to 1.0, then the change in required rate of return will be less than the change in the market risk premium.
-Select-IIIIIIIVVItem 2
New stock's required rate of return will be %. Round your answer to two decimal places.
Explanation / Answer
1) As per CAPM. The expected return on the security is given by:
E(r) = Rf + B(Market Premium)
So we have
0.15 = 0.035 + B * 0.05
Solving for B we get Beta as 2.3
2) If the market premium increases to 7%.
The E(r) would be = 0.035 + 2.3 * 0.07 = 19.6%
Please note as it is not mentioned specifically I am answering only the the first 2 parts of the question.
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