BETA AND REQUIRED RATE OF RETURN A stock has a required return of 9%; the risk-f

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BETA AND REQUIRED RATE OF RETURN

A stock has a required return of 9%; the risk-free rate is 2.5%; and the market risk premium is 6%.

1. What is the stock's beta? Round your answer to two decimal places.

a. 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.

b. 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.

c. 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.

d. 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.

e. 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.

BETA AND REQUIRED RATE OF RETURN

A stock has a required return of 9%; the risk-free rate is 2.5%; and the market risk premium is 6%.

1. What is the stock's beta? Round your answer to two decimal places.

2. If the market risk premium increased to 8%, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged. Pick one below:

a. 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.

b. 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.

c. 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.

d. 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.

e. 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.

3. New stock's required rate of return will be _______ %. Round your answer to two decimal places.

Explanation / Answer

1. Required Return = Risk Free Rate + Market Risk Premium *Beta

9% = 2.5 % + 6% * Beta

or beta =( 9% -2.5% )/ 6%

= 1.08

2. The correct answer is:

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.

Stock's Beta = 1.08, which means it is greater than 1

Change in Market Risk Premium = 8% -6%

= 2%

change in required rate of return = 11.17% -9%

= 2.17%

3. stock's required rate of return =

= Risk Free Rate + Market Risk Premium *Beta

= 2.5%+ 8%*1.08333

= 11.17%

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