Question

Stock R has a beta of 2.3, Stock S has a beta of 0.55, the required return on an average stock is 10%, and the risk-free rate of return is 6%. By how much does the required return on the riskier stock exceed the required return on the less risky stock? Round your answer to two decimal places.

Answer #1

Let's start solving by recalling the **Capital Assets
Pricing Model(CAPM)**. According to CAPM, the required
return can be calculated by:

*Risk-Free Rate + Beta * Risk Premium*

*Now, Picking up the riskier stock whose beta is 2.3 and Risk
Premium, which is the difference between the stock return and
risk-free return ie. 4% (10% - 6%) In this
case,*

Required Rate of Return = 6% + 2.3 * 4%

Required rate of Return = 6% + 9.2% = **15.2%**

The same formula can be used to calculate the required rate of return of less risky stock like this.

Required Rate of Return = 6% + 0.55 * 4% (This time, *beta
has changed to 0.55*)

Required Rate of Return = 6% + 2.2%

Required Rate of Return = **8.2%**

**As stated in the above calculations, the required return
on the riskier stock exceeds the required return on the less risky
stock by 7%** *(15.2% - 8.2%).*

Stock R has a beta of 1.4, Stock S has a beta of 0.55, the
expected rate of return on an average stock is 12%, and the
risk-free rate is 4%. By how much does the required return on the
riskier stock exceed that on the less risky stock? Do not round
intermediate calculations. Round your answer to two decimal
places.

Stock R has a beta of 1.5, Stock S has a beta of 0.75, the
required return on an average stock is 9%, and the risk-free rate
of return is 6%. By how much does the required return on the
riskier stock exceed the required return on the less risky stock?
Round your answer to two decimal places.
%

Stock R has a beta of 1.4, Stock S has a beta of 0.9, the
required return on an average stock is 10%, and the risk-free rate
of return is 7%. By how much does the required return on the
riskier stock exceed the required return on the less risky stock?
Round your answer to two decimal places.

Stock R has a beta of 2.0, Stock S has a beta of 0.45, the
required return on an average stock is 14%, and the risk-free rate
of return is 3%. By how much does the required return on the
riskier stock exceed the required return on the less risky stock?
Round your answer to two decimal places.

Stock R has a beta of 2.0, Stock S has a beta of 0.95, the
required return on an average stock is 13%, and the risk-free rate
of return is 5%. By how much does the required return on the
riskier stock exceed the required return on the less risky stock?
Round your answer to two decimal places.
%

Stock R has a beta of 1.5, Stock S has a beta of 0.85, the
expected rate of return on an average stock is 13%, and the
risk-free rate is 4%. By how much does the required return on the
riskier stock exceed that on the less risky stock? Do not round
intermediate calculations. Round your answer to two decimal
places.

Stock R has a beta of 0.89, Stock S has a beta of 1.75, the
expected rate of return on an average stock is 12.90%, and the
risk-free rate is 6.05%. By how much does the required return on
the riskier stock exceed that on the less risky stock?

Required Rate of Return
Stock R has a beta of 1.9, Stock S has a beta of 0.65, the
expected rate of return on an average stock is 12%, and the
risk-free rate is 4%. By how much does the required return on the
riskier stock exceed that on the less risky stock? Round your
answer to two decimal places.
Historical Returns: Expected and Required Rates of Return
You have observed the following returns over time:
Year
Stock X
Stock...

You want to invest in two different shares, A & B. Share A
has a beta of 1.41 and share B has a beta of 0.94.
The expected return on an average share is 12.76. The risk-free
rate is 7.15.
By how much does the required return on the riskier share exceed
the required return on the less risky share

Beale Manufacturing Company has a beta of 1.4, and Foley
Industries has a beta of 0.8. The required return on an index fund
that holds the entire stock market is 10%. The risk-free rate of
interest is 6%. By how much does Beale's required return exceed
Foley's required return? Round your answer to two decimal
places.
%

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