Question

You are holding a stock that has a beta of 2.63 and is currently in equilibrium. The required return on the stock is 39.40% and the return on a risk-free asset is 8.0%. What would be the return on the stock if the stock's beta increased to 3.66 while the risk-free rate and market return remained unchanged?

Answer 1

Ans return on the stock if the stock's beta increased to 3.66 = 51.70%

Required Return =	Risk free Return + (Market Return - Risk free return)* Beta
Required Return =	8% + (19.9392% - 8%)*3.66
Required Return =	51.70%
Required Return =	Risk free Return + (Market Return - Risk free return)* Beta
39.40% =	8% + (Market Return - 8%)*2.63
39.40% - 8% =	(Market Return - 8%)*2.63
31.40% =	(Market Return - 8%)*2.63
(Market Return - 8%) =	31.40% / 2.63
(Market Return - 8%) =	11.9392%
Market Return -	11.9392% + 8%
Market Return -	19.939200%