Question

Stock R has a beta of 1.2, Stock S has a beta of 0.65, the required return on an average stock is 9%, and the risk-free rate of return is 3%. By how much does the required return on the riskier stock exceed the required return on the less risky stock? Round your answer to two decimal places. %

Answer 1

Difference in Required return = Difference In Beta*(Return on Average Stock – Risk free return)

= (1.2-0.65)*(9%-3%)

= 3.3%

Required return = Risk free rate + beta*(Market return – risk free return)

9.75% = 3% + beta*9.5%

beta = 0.71

Portfolio beta is equal to weighted average beta

= 0.3*35000/115000 + 1.4*80,000/115000

= 1.0652

i.e. 1.07

Fund Beta = 1.5*360,000/4,990,000 – 0.5*780,000/4,990,000 + 1.25*1,100,000/4,990,000+ 0.75*2750,000/4990,000

= 0.79

Required rate of return = 4% + 0.79%*(11%-4%)

= 9.53%