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28 August, 16:56

Stock R has a beta of 2.5, Stock S has a beta of 0.25, the required return on an average stock is 10%, 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

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  1. 28 August, 17:11
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    Excess return=0.1575=15.75%

    Explanation:

    Given dа ta:

    Stock R beta=2.5

    Stock S beta=0.25

    return on an average stock=10%

    the risk-free rate of return=3%

    Required:

    Excess return=?

    Solution:

    Difference in beta=Stock R beta-Stock S beta

    Difference in beta=2.5-0.25

    Difference in beta=2.25

    Market Premium = return on an average stock-the risk-free rate of return

    Market Premium=10%-3%

    Market Premium=7%

    Excess return=Market Premium*Difference in beta

    Excess return=7%*2.25

    Excess return=0.07*2.25

    Excess return=0.1575=15.75%
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