Problem 8-5 Beta and required rate of return A stock has a required return of 11
ID: 2647043 • Letter: P
Question
Problem 8-5
Beta and required rate of return
A stock has a required return of 11%; the risk-free rate is 3.5%; and the market risk premium is 5%.
What is the stock's beta? Round your answer to two decimal places.
New stock's required rate of return will be %. Round your answer to two decimal places.
Problem 8-12
Required rate of return
Suppose rRF = 5%, rM = 10%, and bi = 1.3.
What is ri, the required rate of return on Stock i? Round your answer to two decimal places.
%
Now assume that rRF remains at 5% but rM increases to 11%. The slope of the SML does not remain constant. How would these changes affect ri? Round your answer to two decimal places.
The new ri will be %
Now assume that rRF remains at 5% but rM falls to 9%. The slope of the SML does not remain constant. How would these changes affect ri? Round your answer to two decimal places.
The new ri will be
%
Explanation / Answer
Problem 8-5
Beta and required rate of return
A stock has a required return of 11%; the risk-free rate is 3.5%; and the market risk premium is 5%.
What is the stock's beta? Round your answer to two decimal places.
As per CAPM
Required return = risk-free rate + market risk premium*beta
11 = 3.5 + 5*beta
Beta =( 11 -3.5)/5
Beta = 1.50
Problem 8-12
Required rate of return
Suppose rRF = 5%, rM = 10%, and bi = 1.3.
What is ri, the required rate of return on Stock i? Round your answer to two decimal places.
As per CAPM
Required return = risk-free rate + market risk premium*beta
Required return = 5 + (10-5)*1.3
Required return = 11.50%
Now assume that rRF remains at 5% but rM increases to 11%. The slope of the SML does not remain constant. How would these changes affect ri? Round your answer to two decimal places.
As per CAPM
Required return = risk-free rate + market risk premium*beta
Required return = 5 + (11-5)*1.3
Required return = 12.80%
The new ri will be 12.80 %
Now assume that rRF remains at 5% but rM falls to 9%. The slope of the SML does not remain constant. How would these changes affect ri? Round your answer to two decimal places.
As per CAPM
Required return = risk-free rate + market risk premium*beta
Required return = 5 + (9-5)*1.3
Required return = 10.20%
The new ri will be 10.20 %