Based on CAPM,
Expected return = Risk free rate + Beta * Market risk premium
a) 13% = 3.5% + Beta * 4%
9.5% = Beta * 4%
Beta = 2.38
b) Now, based on the CAPM relation above, required return on stock is directly related to market risk premium and varies by Beta. Based on this and the relationship above, statement 3 is correct.
c) Stock's required rate of return = 3.5% + 2.375 * 5%
Stock's required rate of return = 15.375% = 15.38%
8.5 A stock has a required return of 13%, the risk-free rate is 3.5%, and the...
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