The risk-free rate of interest is 4% and the market risk premium is 9%. Howard Corporation has a beta of 2.0, and last year generated a return of 16% with a standard deviation of returns of 27%. The required return on Howard Corporation stock? is:

A. 26%.

B. 22%.

C. 14%.

D. 36%.

B. 22%.

Explanation:

Capital asset pricing model (CAPM) relates the required rate of return on an asset to its riskiness, as measured by the asset's beta. An asset's beta is the volatility of the asset's returns relative to the volatility of market returns. The expected return on the asset = risk-free rate + beta * market risk premium.

===> 4% + 2x9% = ==> 22%.