Question

Assume that the risk-free rate is 4% and the required return on the market is 11%. What is the required rate of return on a stock with a beta of 2.1? Round your answer to two decimal places.

  %

Answer 1

Sol:

Risk free rate = 4%

Market rate of return = 11%

Beta = 2.1

To determine required rate of return on stock

Required rate of return on stock = Risk free rate + Beta x (Market rate of return - Risk free rate)

Required rate of return on stock = 4% + 2.1 x (11% - 4%)

Required rate of return on stock = 4% + (2.1 x 7%)

Required rate of return on stock = 0.04 + (2.1 x 0.07)

Required rate of return on stock = 0.04 + 0.147 = 0.187 or 18.7%

Therefore required rate of return on stock will be 18.7%