Question

EXPECTED AND REQUIRED RATES OF RETURN

Assume that the risk-free rate is 6.5% and the market risk premium is 8%.

1. What is the required return for the overall stock market? Round your answer to two decimal places.
   %

2. What is the required rate of return on a stock with a beta of 0.6? Round your answer to two decimal places.
   %

Answer 1

a.	14.50%
Working:
Market has always beta of 1.
As per capital asset pricing model,
Required rate of return			=	Risk free rate + Beta *Market risk premium
			=	6.5%+1*8%
			=	14.50%
b.	11.30%
Working:
As per capital asset pricing model,
Required rate of return			=	Risk free rate + Beta *Market risk premium
			=	6.5%+0.6*8%
			=	11.30%