Final answer:
The required return, rS, for the stock is 10.47% per year.
Step-by-step explanation:
The required return, rS, for the stock can be calculated using the formula:
rS = risk free rate + beta × market risk premium
Substituting the given values:
rS = 2.0% + 1.21 × 7%
rS = 2.0% + 8.47% = 10.47%
Therefore, the required return for this stock is 10.47% per year. The required return, rS, for a stock can be calculated using the Capital Asset Pricing Model (CAPM), which is a model that describes the relationship between systematic risk and expected return for assets, particularly stocks. CAPM states that the expected return on a security is equal to the risk-free rate plus the product of the asset's beta and the market risk premium.
The formula for CAPM is given by:
Expected Return (rS) = Risk-Free Rate + (Beta * Market Risk Premium)
Given that the risk-free rate is 2.0% per year, the beta of the firm is 1.21, and the market risk premium is 7% per year, the calculation for the required return is:
rS = 2.0% + (1.21 * 7%)
rS = 2.0% + 8.47%
rS = 10.47%
Therefore, the required return, rS, for this stock is 10.47% per year.