Question

Stock R has a beta of 1.5, Stock S has a beta of 0.75, the required return on an average stock is 9%, and the risk-free rate of return is 6%. By how much does the required return on the riskier stock exceed the required return on the less risky stock? Round your answer to two decimal places.

  %

Answer 1

Answer :

Here, Given that

Stock R : Beta = 1.5

Stock S : Beta = 0.75

Return on average stock ( Rm ) = 9%

Risk-free rate ( Rf ) = 6%

Now,

Return from Stock R = Rf + [ Beta ( Rm - Rf ) ]

= 6 + [ 1.5 ( 9 - 6 ) ]

= 6 + [ 1.5 * 3 ]

= 6 + 4.5

= 10.50%

Return from Stock S = Rf + [ Beta ( Rm - Rf ) ]

= 6 + [ 0.75 ( 9 - 6 ) ]

= 6 + [ 0.75 * 3 ]

= 6 + 2.25

= 8.25%

Here, More risky stock is R and less risky stock is S. Since, Stock R has more beta than the Stock S.

Therefore,

Difference = 10.50% - 8.25% = 2.25%