Question

Assume that the risk-free rate is 4.5% and the market risk premium is 4\%. What is the required return for the overall stock market? Round your answer to one decimal place. What is the required rate of return on a stock with a beta of 0.4 ?

Answer 1

The required return for the overall stock market is 8.5%. The required rate of return on a stock with a beta of 0.4 is 6.1%.

Step-by-step explanation:

The required return for the overall stock market can be calculated using the formula:

Required Return = Risk-Free Rate + Beta × Market Risk Premium

Given that the risk-free rate is 4.5% and the market risk premium is 4%, we can substitute these values into the formula:

Required Return = 0.045 + 0.04 = 0.085 = 8.5%

Therefore, the required return for the overall stock market is 8.5%.

To find the required rate of return on a stock with a beta of 0.4, we can substitute the beta value into the formula:

Required Return = 0.045 + 0.4 × 0.04 = 0.045 + 0.016 = 0.061 = 6.1%

Therefore, the required rate of return on a stock with a beta of 0.4 is 6.1%.