Question

Suppose rRF = 4%, rM = 9%, and rA = 10%. Calculate Stock A's beta. Round your answer to one decimal place.

If Stock A's beta were 1.6, then what would be A's new required rate of return? Round your answer to one decimal place. %

Answer 1

Answer;

Part 1

Beta = 1.2

As par CAPM

rA = rF + Beta x (rM - rF)

So,

rA = 10%

rM = 9%

rF = 4 %

Beta =?

10% = 4% + Beta x(9%-4%)

10% = 4% + beta x 5%

Beta x 5% = 10% - 4%

Beta x 5% = 6%

Beta = 6%/5%

Beta = 1.2

Part 2

New required return =12%

Explanation;

rA = rF + Beta x (rM - rF)

rF = 4%

Beta = 1.6

rM = 9%

So,

rA = 4% + 1.6 x ( 9% - 4%)

rA = 4% + 1.6 x (5%)

rA = 4% + 8%

rA = 12%

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