Question

Stock R has a beta of 1, Stock S has a beta of 0.45, the required return on an average stock is 9%, and the risk-free rate of return is 3%. By how much does the required return on the riskier stock exceed the required return on the less risky stock? Round your answer to two decimal places.

Answer 1

3.00%

Step-by-step explanation:

Required return of a stock = Risk free rate of return + (average required return - Risk free rate of return) (Beta of the stock)

Required return of Stock R = 0.03 + [ (0.09 - 0.03) * 1)] = 0.09

Required return of Stock S = 0.03 + [ (0.09 - 0.03) * 0.45)] = 0.06

Difference = 0.09 - 0.06 = 0.03, or 3%

Therefore, the required return on the riskier stock will exceed the required return on the less risky stock by 3.00%.