Question

Question 21

OKAY stock has a beta of 0.73. The market as a whole is expected to increase by 20% thereby causing OKAY stock to

		decline by 20.7%.
		decline by 14.6%.
		increase by 20.7%.
		increase by 14.6%.

Question 25

What is the expected return on a stock with a beta of 0.09, a market risk premium of 4%, and a expected market return of 8%?

		4.36%
		6.92%
		8.27%
		8.36%

I need the answer to both questions please. ty

Answer 1

Answer 21: Correct answer is "increase by 14.6%".

Expected return=Risk free rate + Beta*(Market return - Risk free rate)
Risk free rate is constant here and only beta and market return have changed as per the question.
Market return - Risk free rate=Market risk premium
Now, if market return increases by 20%, then market risk premium will also increase by 20%.
Beta=.73

Now, Beta*Market risk premium will increase by 0.73*20%=0.146 or 14.60%

Answer 22: Correct answer is 4.36%

Expected return on the stock=Risk free rate + Beta*(Market return - Risk free rate)
Market return - Risk free rate=Market risk premium
Given that:
Market risk premium of 4%, and a expected market return of 8%
Risk free rate=Market return-Market risk premium =8%-4%=4%
Given that beta=0.09
Expected return on the stock=4%+0.09*(8%-4%)=4%+0.09*4%=0.0436 or 4.36%