Question

A stock has a required return of 16%, the risk-free rate is 5.5%, 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 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

a)required rate of return= risk free rate+ beta* market risk premium

16%=5.5%+beta*3%

beta =(16%-5.5%)/3%

beta =3.50

b)

16%=5.5%+beta*7%

beta =(16%-5.5%)/7%

beta =1.50

c) opiton I is correct

when beta is greater than one change will be greater than one

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reason for other incorrect and correct

iiIf the stock's beta is less than 1.0, then the change in required rate of return will be less than the change in the market risk premium

iii) 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.

iv)If the stock's beta is equal to 1.0, then the change in required rate of return will be equal change in the market risk premium.

v)If the stock's beta is equal to 1.0, then the change in required rate of return will be equal the change in the market risk premium.