Question

A stock has a required return of 12%, the risk-free rate is 3%, and the market risk premium is 3%.

1. What is the stock's beta? Round your answer to two decimal places.
   
   
2. If the market risk premium increased to 10%, 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 equal to 1.0, then the change in required rate of return will be less than the change in the market risk premium.
   2. 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.
   3. 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.
   4. 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.
   5. 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.

Answer 1

Part A

Required rate of return = Risk free rate of return + Beta * (Market rate of return - Risk free rate of return)

12 = 3 + ( Beta * 3)

9 = beta * 3

Beta = 3

So, stock beta is 3.

Part b

If Market risk premium is 10%,

Then Required rate of return = 3 + (3 * 10=)

Required of return = 39%

Stock beta is greater than 1. Change in market risk premium is 10%, while change in required rate of return is 27%.

So, If 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.

will Be II