Question

A stock has a required return of 11%, the risk-free rate is 7,5%, and the market risk premium is 2%. a. What is the stock's beta? Round your answer to two decimal places. b. If the market risk premium increased to 476 , what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged. Do not round intermediate calculations. Round your answer to two decimal places. 1. If the stock's beta is equal to 1.0, then the change in required rate of return will be greater than the change in the market risk premium. I1. If the stock's beta is equal to 1.0, then the change in required rate of return will be less than the change in the market risk premium. 111. If the stock's beta is greater than 1,0 , then the change in required rate of return will be greater than the change in the market riak premium. IV. If the stock's beto is less than 1,0 , then the change in required rate of return will be greater than the change in the market risk premium. V. If the stock's beta is greater than 1.0, then the change in required rate of return will be less than the change in the market risk premium. stock's required rate of return will be

Answer 1

a. The stock's beta is 1.75. b. If the market risk premium increased, the stock's required rate of return would also increase.

Step-by-step explanation:

a. Beta is a measure of a stock's sensitivity to changes in the overall market. In this case, the required return of 11% is the expected return on the stock. The risk-free rate of 7.5% and the market risk premium of 2% are used to calculate the required return.

To calculate the beta, we can use the formula: Beta = (Required return - Risk-free rate) / Market risk premium. Substituting the values: Beta = (0.11 - 0.075) / 0.02 = 1.75. Therefore, the stock's beta is 1.75.

b. If the market risk premium increases, it would mean that investors require a higher return for taking on the risk of investing in the stock market. As a result, the stock's required rate of return would also increase. The risk-free rate and the beta remain unchanged in this scenario.