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21 July, 00:36

Stock R has a beta of 1.8, Stock S has a beta of 0.75, the expected rate of return on an average stock is 9%, and the risk-free rate is 5%. By how much does the required return on the riskier stock exceed that on the less risky stock

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  1. 21 July, 01:05
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    Stock R more beta than Stock S = 4.2%

    Explanation:

    given data

    Stock R beta = 1.8

    Stock S beta = 0.75

    expected rate of return = 9% = 0.09

    risk-free rate = 5% = 0.05

    solution

    we get here Required Return

    Required Return (Re) = risk-free rate + (expected rate of return - risk-free rate) beta ... 1

    Required Return (Re) = 0.05 + (0.09 - 0.05) B

    Required Return (Re) =

    so here

    Stock R = 0.05 + (0.09 - 0.05) 1.8

    Stock R = 0.122 = 12.2 %

    and

    Stock S = 0.05 + (0.09 - 0.05) 0.75

    Stock S = 0.08 = 8%

    so here more risky stock is R and here less risky stock is S

    Stock R is more beta than the Stock S.

    Stock R more beta Stock S = 12.2 % - 8%

    Stock R more beta Stock S = 4.2%
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