Problem 8.05 Check My Work Beta and required rate of return : A stock has a requ
ID: 2824470 • Letter: P
Question
Problem 8.05 Check My Work Beta and required rate of return : A stock has a required return of 13%; the risk-free rate is 45%; and the market risk premium is 4%. a. What is the stock's beta? Round your answer to two decimal places. b. If the market risk premium increased to 10%, what would happen to the stock's required rate of return? Assume the 1. If the stock's beta II. If the stock's beta is equal to 1.0, then the change in required r 111. If the stock's beta is equal to 1.0, then IV. If the stock's beta is greater than v. 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 is greater than 1.0, then the change in required rate of return will be less than the change in the market risk premium. ate of return will be greater than the change in the market risk premium. the change in required rate of return will be less than the change in the market risk premium. 1.0, then the change in required rate of return will be greater than the change in the market risk premium. New stock's required rate of return will be Round Check My Work Oleon KeyExplanation / Answer
As per rules I will answer the first 4 sub parts of the question
a: 1: Stocks Beta =
Required rate = Rf+ Beta*Market risk premium
13%=4.5%+ Beta*4%
Beta = 8.5%/4% = 2.125
b) 2: IV
(If the beta>1, change in required rate will be greater than the change in market risk premium due to the CAPM equation and since Beta is multiplied to the premium)
b)3 : Required rate = Rf+ Beta*Market risk premium
=4.5%+ 2.125* 10%
=25.75%
8-2 a: 4: Expected rate for stock Y = Sum of Probabilities*Returns/ Sum of probabilities
= (0.1*-27%+ 0.3*0+ 0.3*18%+ 0.2*26% + 0.1*35%)/ 1
= 11.4%