Question

987 WIGR - Grand Davenport Unwes Penn Siguin Cengage S tar 105.7 West MINDTAP Q Search this con nment Week 5 Homework Assignment Week 5 Assignment Score: 22.22% Save Submit Assignment for Grading "roblem 8.05 (Beta and Required Rate of Return) • Question 5 of 9 Check My Works 1 remaining) eBook stock has a required return of 8%, the risk-free rate is 3%, and the market risk premium is 3% What is the stock's beta? Round your answer to two decimal places. Full . If the market risk premium increased to 8%, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged. Do not round intermediate calculations. Round your answer to two decimal places. 1. If the stock's beta is less than 1.0, then the change in required rate of return will be greater than the change in the market risk premium. II. If the stock's beta is greater than 1.0, then the change in required rate of return will be less than the change in the market risk premium. TIT. If the stock's beta is equal to 1.0, then the change in required rate of return will be greater than the change in the market risk premium. IV. If the stock's beta is equal to 1.0, then the change in required rate of return will be less than the change in the market risk premium. V. If the stock's beta is greater than 1.0, then the change in required rate of return will be greater than the change in the market risk premium. -Select- New stock's required rate of return will be Check My Work (a remaining) Icon Key Problem 8.05 (Beta and Required Rate of Return) Question 5 of 9 Submit Assignment for Grading Mind Tap - Cengage L e ZENworks Application LCROWLEY.P316 - 1... x w wk 5.xsx - Excel 1/4

Answer 1

a. Stock Beta =(Expected Return -Risk Free Rate)/(Market Return-Risk free Rate) =(9%-3%)/3% =2.00

b. Option b is correct. Higher the beta higher is the change in market return.

c. New Stock's return =Risk Free Rate+Beta*(Market Return -Risk Free Rate) =3%+2*8% =19%