Question

A stock has a required return of 16%, the risk-free rate is 6.5%, and the market risk premium is 5%.

1. What is the stock's beta? Round your answer to two decimal places.
   
   
2. If the market risk premium increased to 7%, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged. Do not round intermediate calculations. Round your answer to two decimal places.
   1. 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.
   2. 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.
   3. 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.
   4. 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.
   5. 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.
   
   -Select-IIIIIIIVVItem 2
   
   New stock's required rate of return will be   %.

Answer 1

Stock's beta	(Rs-Rf)÷Rp
Here,
Risk free rate of return (Rf)	6.50%
Market risk premium (Rp)	5.00%
Required rate of return (Rs)	16.00%
Stock's beta	1.90
	(16%-6.5%)÷5%

Correct option is I.

New stock's required rate of return	Rf+β×Rp
Here,
Risk free rate of return (Rf)	6.50%
Beta of the stock (β)	1.90
Market risk premium (Rp)	7.00%
New stock's required rate of return	19.80%
	6.5%+1.9×7%