Question

2. Stock A has a beta of 1.30, and its required return is 12.00%. Stock B's beta is 0.80. If the risk-free rate is 4.75%, what is the required rate of return on stock B?

Answer 1

9.21%

Step-by-step explanation:

Required return of Stock A = Risk free rate + (Beta of Stock A x Market risk premium)

12.00% = 4.75% + (1.30 x Market risk premium)

=> Market risk premium = 5.58%

Required return of Stock B:

= Risk free rate + (Beta of Stock B x Market risk

premium)

= 4.75% + (0.80 x 5.58%)

= 9.21%

Therefore, the required rate of return on B's stock is 9.21%.