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12 April, 09:07

Fiske Roofing Supplies' stock has a beta of 1.23, its required return is 11.75%, and the risk-free rate is 4.30%. What is the required rate of return on the market? (Hint: First find the market risk premium.) Select one:

a. 10.36%

b. 10.62%

c. 10.88%

d. 11.15%

e. 11.43%

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  1. 12 April, 09:24
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    ER (P) = Rf + β (Rm - Rf)

    11.75 = 4.30 + 1.23 (Rm - Rf)

    11.75 - 4.30 = 1.23Rm - 5.289

    7.45 + 5.289 = 1.23Rm

    12.739 = 1.23Rm

    Rm = 12.739/1.23

    Rm = 10.36%

    Explanation: The expected return of a stock is a function of risk-free rate plus market risk premium. Market risk premium is equal to beta multiplied by risk premium. Risk premium is market return minus risk free rate.
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