Question

A stock has a beta of 1.40, the total market return is 8.0%, and the market risk premium is 45.50%. What is the required rate of return? (please show work)

A) 7.70%

B) 10.20%

C) 11.95%

D)12.83%

Answer 1

I belive there is a typo error in the question with regard to Risk Premium; Risk Premium is mentioned as 45.5%; This cannot be the situation when the Total Market Return itself is 8%; Hence, I believe, the Market Risk premium shall be 5.5%;

Based on this assumption, pls find below workings:

Total Market Return = 8%

Market Risk Premium = 5.5%

Risk Free Return (Total Market Return - Market Risk Premium) = 8% - 5.5% = 2.5%

Beta Factor = 1.40

Required Rate of Return = Risk Free Return + (Risk Premium * Beta Factor) = 2.5% + (5.5% * 1.40) =10.20% Answer (B)