Stock A's stock has a beta of 1.5, and its required return is 12.00%. Stock B's...

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Answer 1

Answer #1

Under Capital Asset Pricing Model, Expected return = Risk free rate + beta*market risk premium

Using this formula and data for Stock A, first we need to calculate the market risk premium.

Expected return (Stock A) = Risk free rate + beta*market risk premium

0.12 = 0.0475 + 1.5*market risk premium

0.0725 = 1.5*market risk premium

Market risk premium = 0.0725/1.5

Market risk premium = 0.0483 = 4.83%

Expected return (Stock B) = Risk free rate + beta*market risk premium

Expected return (Stock B) = 0.0475 + 0.8*0.0483 = 0.0862

Expected return (Stock B) = 8.62%

Correct answer = B. 8.62%

Please give me your valuable feedback if the answer is helpful.

Answer 2

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