Question

Given a risk-free rate of 3% and a market risk premium of 4.5%, calculate the required (expected) return for a stock with beta = 2.0.

a) 9%
b) 10.5%
c) 12%
d) 13.5%

Answer 1

Using the Capital Asset Pricing Model (CAPM), the required (expected) return for the stock with beta = 2.0, given a risk-free rate of 3% and a market risk premium of 4.5%, is calculated to be 12%.

Step-by-step explanation:

The student has been asked to calculate the required (expected) return for a stock with beta = 2.0 given a risk-free rate of 3% and a market risk premium of 4.5%. This can be calculated using the Capital Asset Pricing Model (CAPM), which is expressed as:

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

By plugging in the given values:

Required Return = 3% + (2.0 × 4.5%) = 3% + 9% = 12%.

Therefore, the correct answer is (c) 12%.