Question

EXPECTED AND REQUIRED RATES OF RETURN Assume that the risk-free rate is 5% and the market risk premium is 6%. What is the required return for the overall stock market? What is the required rate of return on a stock with a beta of 1.2?

Answer 1

Required rate of return = Risk free rate + beta * market risk premium
= 5% + (1 * 6%)
= 11%

Required rate of return on a stock with a beta of 1.2 = 5% + (1.2 * 6%)
= 5% + 7.2%
= 12.2%