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20 May, 00:58

Stock A's stock has a beta of 1.30, and its required return is 12.00%. Stock B's beta is 0.80. If the risk-free rate is 4.75%, what is the required rate of return on B's stock

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  1. 20 May, 01:06
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    9.21%

    Explanation:

    Required return of Stock A = Risk free rate + (Beta of Stock A * Market risk premium)

    12.00% = 4.75% + (1.30 * Market risk premium)

    => Market risk premium = 5.58%

    Required return of Stock B:

    = Risk free rate + (Beta of Stock B * Market risk premium)

    = 4.75% + (0.80 * 5.58%)

    = 9.21%

    Therefore, the required rate of return on B's stock is 9.21%.
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