Question

Stock R has a beta of 1.7, Stock S has a beta of 0.95, the expected rate of return on an average stock is 10%, and the risk-free rate is 3%. By how much does the required return on the riskier stock exceed that on the less risky stock

Answer 1

7.5%

Step-by-step explanation:

according to CAPM -

Required rate of return = risk free rate + (beta x expected rate of return on the average stock)

Stock R = 3% + (10% X 1.7) = 20%

Stock S = 3% + (10% X 0.95) = 12.5%

20% - 12.5% = 7.5%