Question

Stock A has a beta of 0, the risk-free rate is 4% and the return on the market is 9%. If the market risk premium changes by 1%, by how much will the required return on Stock A change?

Answer 1

As per CAPM,

where, rf = Risk free return = 4%

Rmp = Market Risk Premium = (Market return - Risk free Return)

= 9% - 4% = 5%

Stock A's Beta = 0

Required Return = 4% +0(5%)

Required Return = 4%

At Beta 0, Stock A's Required Return is equal to Risk free return which measn the stock is risk free.

- So, Change in Risk premium will not impact the Required Return of STock A as it has 0 beta at which return is risk free.

Thus, Required Return willchnage by 0%

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