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Required Rate of Return

Suppose rRF = 4%, rM = 9%, and rA = 12%.
Calculate Stock A's beta. Round your answer to one decimal place.
If Stock A's beta were 1.9, then what would be A's new required rate of return? Round your answer to one decimal place. %

Answer :

Answer: See explanation

Explanation:

1. Based on the information given, Stock A's beta will be calculated below using the formula:

Required return = risk-free rate + Beta × (market rate- risk-free rate )

We then input in the values given into the formula which will be:

12 = 4 + Beta × (9-4)

Beta = (12-4) / (9-4)

Beta = 8/5

Beta = 1.6

Therefore, stock A beta = 1.6

2. If Stock A's beta were 1.9, then what would be A's new required rate of return?

This will be:

= 4 + [1.9 × (9-4)]

= 4 + (1.9 × 5)

= 4 + 9.5

= 13.5%

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