Question

Show your work. Suppose rRF = 6%; rM = 10%; and rA = 14% Calculate Stocks A’s beta. If Stock A’s beta were 2.0, then what would be A’s new required rate of return?

Answer 1

Stock A's beta= 2

The new required rate of return = 14%

Step-by-step explanation:

The risk free return is 6%

The return of market portfolio is 10%

The return of security A is 14%

(A) The beta of stock A can be calculated as follows

Return of security A= Risk free return+ beta(return of market portfolio-risk free return)

14%= 6% + beta(10%-6%)

14%=6% + 4%beta

14%-6%= 4%beta

8%= 4%beta

beta= 8%/4%

beta= 2

(B) Stock A's required rate of return can be calculated as follows

Required rate of return= 6% + 2(10%-6%)

= 6% + 2(4%)

= 6% + 8%

= 14%

Hence the Stock A's beta is 2 and the required rate of return for A is 14%