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18 January, 17:38

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? (Hint: First find the market risk premium.) a. 8.76%b. 8.98%c. 9.21%d. 9.44%e. 9.68%

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  1. 18 January, 17:39
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    c. 9.21%

    Explanation:

    In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below

    Expected rate of return = Risk-free rate of return + Beta * (Market rate of return - Risk-free rate of return)

    For stock A

    12% = 4.75% + 1.30 * market risk premium

    12% - 4.75% = 1.30 * market risk premium

    7.25% = 1.30 * market risk premium

    So, the market risk premium = 5.58%

    For Stock B, required rate of return would be

    = 4.75% + 0.80 * 5.58%

    = 4.75% + 4.464%

    = 9.214%
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