Question

Stock R has a beta of 1.8, Stock S has a beta of 0.75, the expected rate of return on an average stock is 9%, and the risk-free rate is 5%. By how much does the required return on the riskier stock exceed that on the less risky stock

Answer 1

Stock R more beta than Stock S = 4.2%

Step-by-step explanation:

given data

Stock R beta = 1.8

Stock S beta = 0.75

expected rate of return = 9% = 0.09

risk-free rate = 5% = 0.05

solution

we get here Required Return

Required Return (Re) = risk-free rate + ( expected rate of return - risk-free rate ) beta ...........1

Required Return (Re) = 0.05 + ( 0.09 - 0.05 ) B

Required Return (Re) =

so here

Stock R = 0.05 + ( 0.09 - 0.05 ) 1.8

Stock R = 0.122 = 12.2 %

and

Stock S = 0.05 + ( 0.09 - 0.05 ) 0.75

Stock S = 0.08 = 8%

so here more risky stock is R and here less risky stock is S

Stock R is more beta than the Stock S.

Stock R more beta Stock S = 12.2 % - 8%

Stock R more beta Stock S = 4.2%