Question

Assume that the risk-free rate is 3.5% and the market risk premium is 4%. What is the required return for the overall stock market? Round your answer to two decimal places. % What is the required rate of return on a stock with a beta of 1.2? Round your answer to two decimal places. %

Answer 1

Required return for the overall stock market = 4.1%

Explanation;

As per information of the question, following information are given;

Risk free rate = 3.5%

Market risk premium = 4%

Beta = 1.2

Formula of required return for the overall stock market is as follow;

Risk free rate + (market risk premium – Risk free rate) * Beta

Now, let’s put the values in above given formula;

Required return for the overall stock market =

3.5% + (4% - 3.5%) 1.2

= 3.5% + 0.6

= 4.1%