Question

A stock has a required return of 15%, the risk-free rate is 4.5%, 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 6%, what would happen to the stock's required rate of return?

Answer 1

a. The stock's beta is 2.13. b. If the market risk premium increased to 6%, the stock's required rate of return would also increase.

Step-by-step explanation:

a. The stock's beta can be calculated using the formula:

Beta = (Required Return - Risk-Free Rate) / Market Risk Premium

Substituting the given values into the formula:

Beta = (0.15 - 0.045) / 0.04 = 2.125

Therefore, the stock's beta is 2.13 (rounded to two decimal places).

b. If the market risk premium increased to 6%, the stock's required rate of return would also increase. This is because the required rate of return is calculated by adding the risk-free rate to the product of the stock's beta and the market risk premium. Since the market risk premium is higher, the required rate of return would also be higher.