Question

Assume that the risk-free rate is 6.5% and the required return on the market is 8%. What is the required rate of return on a stock with a beta of 2 ? Round your answer to two decimal places. %

Answer 1

Using the Capital Asset Pricing Model (CAPM), the required rate of return on a stock with a beta of 2 given a risk-free rate of 6.5% and a required return on the market of 8% is calculated to be 9.50%,after rounding to two decimal places.

Step-by-step explanation:

To calculate the required rate of return on a stock using the Capital Asset Pricing Model (CAPM), we can use the formula:

R = Rf + β(Rm - Rf)

Where:

• R is the required rate of return on the stock
• Rf is the risk-free rate
• β (beta) represents the risk level of the stock compared to the market
• Rm is the required return on the market

Given:

• Rf = 6.5%
• Rm = 8%
• β = 2

We can plug in these values:

R = 6.5% + 2(8% - 6.5%)

So,

R = 6.5% + 2(1.5%)

R = 6.5% + 3%

R = 9.5%

Therefore, the required rate of return on a stock with a beta of 2 is 9.50% rounded to two decimal places.