Suppose the market return is 8%, the risk-free rate is 1% and the beta for a giv

Question

Suppose the market return is 8%, the risk-free rate is 1% and the beta for a given stock is 1.2. Answer the following questions based on this information:

A. What is the required return for this stock?

B. If the beta increases by 50% (but beta remains at 1.2), what will be the new required return for the stock? What is the percentage-wise change in required return compared to your answer to A) above?

C. If the market return increases by 50% (but beta remains at 1.2), what will be the new required return for the stock? What is the percentage-wise change in required return compared to your answer to A) above?

Explanation / Answer

1. required return=1%+1.2*(8%-1%)=9.4%

2. required return=1%+1.2*1.5*(8%-1%)=13.6%

% change=(13.6-9.4)/9.4=44.6809%

3.

required return=1%+1.2*(8*1.5%-1%)=14.2%

% change=(14.2-9.4)/9.4=51.0638%

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