Question

A stock has a required return of 13%; the risk-free rate is 5%; and the market risk premium is 6%.

What is the stock's beta? Round your answer to two decimal places.

If the market risk premium increased to 10%, what would happen to the stock's required rate of return? Assume the risk-free rate and the beta remain unchanged.

New stock's required rate of return will be  %. Round your answer to two decimal places.

Answer 1

As per CAPM,

Required Return = Risk Free rate + (Market Return - Risk Free Rate ) * Beta

= Risk Free rate + (Market Risk Premium ) * Beta

13 % = 5% + (6% ) *Beta

Or Beta = 8% / 6%

= 1.33

Hence the correct answer is 1.33

If the market risk premium increased to 10%, the  stock's required rate of return would increase.

Hence, the New stock's required rate of return :

Required Return = Risk Free rate + (Market Return - Risk Free Rate ) * Beta

= Risk Free rate + (Market Risk Premium ) * Beta

= 5 % + (10% ) *1.3333

= 18.33%

Hence the correct answer is 18.33%