() Beta and required rate of return A stock has a required return of 10%; the ri
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() Beta and required rate of return A stock has a required return of 10%; the risk-free rate is 5%; and the market risk premium is 3% a. What is the stock's beta? Round your answer to two decimal places. the market nsk premium increased to 7%, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged. 1. If the stock's beta is greater than 1.0, then the change in required rate of retun will be greater than the change in the market risk premium II. 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. m. If the stock's beta is greater than 1.0. ,en the change in required rate of return will be less than the change in the market risk premium. IV. 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. V. 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 New stock's required rate of return will be %. Round your answer to two decimal places.Explanation / Answer
a) The required return as per CAPM is given by the formula: Required return = Risk free return+Beta*Market risk premium Assigning available values into the above equation, we have 10 % = 5% + Beta*3% Solving for Beta (10 - 5 )/3 = Beta Beta = 1.67 (Answer) b) Option I The options relate to the second term of the CAPM equation, which is "Beta*market risk premium". If Beta is more than 1, the change in the 'premium for risk' will be greater than the change in market risk premium. The result is that the change in the required return will be greater than the change in the market risk premium. c) New stock's required return = 16.69% (Answer) [5+1.67*7 = 16.69%]
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