Question

Stock R has a beta of 2.0, Stock S has a beta of 0.45, the required return on an average stock is 14%, and the risk-free rate of return is 3%. By how much does the required return on the riskier stock exceed the required return on the less risky stock? Round your answer to two decimal places.

Answer 1

  

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As per CAPM = Rf + beta * (Rm - Rf)

Rf = Risk Free Rate

Rm = Return on average Stock OR Market

Required return on Stock R = 3% + 2 * (14%-3%) = 25%

Required return on Stock S = 3% + 0.45 * (14%-3%) = 7.95%     

Return on Risky Stock exceeds by = 25% - 7.95% = 17.05%

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