Question

Required Rate of Return

Suppose r_RF = 6%, r_M = 10%, and r_A = 15%.

1. Calculate Stock A's beta. Round your answer to two decimal places.
   
   
2. If Stock A's beta were 1.1, then what would be A's new required rate of return? Round your answer to two decimal places.
   %

Answer 1

Given that the risk free rate=6%, market return=10% and return on stock A=15%

Part a:
Expected return on stock A=Risk free rate + Beta*(Market return-Risk free rate)
=>15%=6%+Beta*(10%-6%)
=>15%-6%=Beta*(10%-6%)
=>0.09=Beta*(0.04)
=>0.09/0.04=Beta
Beta=2.25

Part b:
Now, we need to calculate the expected return using beta=1.1.

Expected return on stock A=Risk free rate + Beta*(Market return-Risk free rate)

Expected return on stock A=6%+1.1*(10%-6%)
=0.06+1.1*(0.04)
=0.06+0.044
=>Expected return on stock A=0.104 or 10.40%