Question

A stock has a required return of 13%; the risk-free rate is 3.5%; 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 9%, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged.

If the stock's beta is greater than 1.0, then the change in required rate of return will be less than the change in the market risk premium. If the stock's beta is equal to 1.0, then the change in required rate of return will be greater than the change in the market risk premium. If the stock's beta is equal to 1.0, then the change in required rate of return will be less than the change in the market risk premium. If the stock's beta is greater than 1.0, then the change in required rate of return will be greater than the change in the market risk premium. If the stock's beta is less than 1.0, then the change in required rate of return will be greater than the change in the market risk premium.

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

Answer 1

Answer :

Calculation of Stock's Beta

Required Return = Risk free Rate + (Beta * Market Risk Premium)

13% = 3.5% + (Beta * 6%)

13% - 3.5% = Beta * 6%

==> Beta = 9.5% / 6%

= 1.58333 or 1.58

If the stock's beta is greater than 1.0, then the change in required rate of return will be greater than the change in the market risk premium is correct as Expected return is directly influenced by market risk premium. If market risk premium increases, expected return on stock would increase.

Calculation of New stock's required rate of return = Risk free Rate + (Beta * Market Risk Premium)

= 3.5 % + (1.58333 * 9%)

= 17.75%