Question

Assume that the risk-free rate is 3.5% and the market risk premium is 5%. What is the required return for overall stock market? What is the required rate of return on a stock with a beta of 1.2?

Answer 1

- Required Return of overall Stock Market = Market risk Premium + Risk free return = 5% + 3.5%

Required Return of overall Stock Market = 8.5%

b). As per CAPM,

where, rf = Risk free return = 3.5%

Rmp = Market risk Premium = 5%

beta of stock = 1.2

Required rate of Return = 3.5% + 1.2(5)

Required rate of Return = 9.5%

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