Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
answer each part correctly PLEASE.
![**Stock Return and Beta Analysis**
A stock has a required return of 15%, the risk-free rate is 3.5%, and the market risk premium is 5%.
a. **What is the stock's beta?**
Round your answer to two decimal places.
[Input Field]
b. **If the market risk premium increased to 7%, 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.
- **I.** 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.
- **II.** 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.
- **III.** 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.
- **IV.** 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.
- **V.** 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.
[Dropdown Box for Selection: I, II, III, IV, V]
The stock's required rate of return will be [Input Field] %.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F552bce27-2e42-4405-9478-45c26e7ea34f%2F6a681b37-a2d9-4351-8262-7211b6bdd342%2Fr0yqh4i_processed.jpeg&w=3840&q=75)
Transcribed Image Text:**Stock Return and Beta Analysis**
A stock has a required return of 15%, the risk-free rate is 3.5%, and the market risk premium is 5%.
a. **What is the stock's beta?**
Round your answer to two decimal places.
[Input Field]
b. **If the market risk premium increased to 7%, 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.
- **I.** 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.
- **II.** 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.
- **III.** 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.
- **IV.** 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.
- **V.** 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.
[Dropdown Box for Selection: I, II, III, IV, V]
The stock's required rate of return will be [Input Field] %.
![**Stock Required Return Analysis**
A stock has a required return of 15%, the risk-free rate is 3.5%, and the market risk premium is 5%.
**a. What is the stock’s beta?**
Round your answer to two decimal places.
[Text Box for Answer]
**b. If the market risk premium increased to 7%, 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.
- I. 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.
- II. 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.
- III. 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.
- IV. 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.
- V. 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.
[Dropdown Menu for Selection]
**New stock’s required rate of return will be**
[Text Box for Percentage Answer]](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F552bce27-2e42-4405-9478-45c26e7ea34f%2F6a681b37-a2d9-4351-8262-7211b6bdd342%2Fwrt07km_processed.jpeg&w=3840&q=75)
Transcribed Image Text:**Stock Required Return Analysis**
A stock has a required return of 15%, the risk-free rate is 3.5%, and the market risk premium is 5%.
**a. What is the stock’s beta?**
Round your answer to two decimal places.
[Text Box for Answer]
**b. If the market risk premium increased to 7%, 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.
- I. 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.
- II. 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.
- III. 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.
- IV. 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.
- V. 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.
[Dropdown Menu for Selection]
**New stock’s required rate of return will be**
[Text Box for Percentage Answer]
Expert Solution
Step 1
Capital asset pricing model (CAPM) is a tool used to measure the expected return on an investment. It is used to calculate the cost of equity. According to the Capital asset pricing model-
Where,
Ra: Expected/Required return on a security
Rf: Risk-free rate
Rm: Expected return of the market
: Beta of the security
Here, Rm-Rf = Market risk premium
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