stock has a required return of 8%, the risk-free rate is 3.5%, and the market risk premium is 3%. a. What is the stock's beta? Round your answer to two decimal places. b. If the market risk premium increased to 8%, 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 greater than 1.0, then the change in required rate of return will be less 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 greater than the change in the market risk premium. III. 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. greater than 1.0, then the change in required rate of return will be greater than the change in the market risk premium. less 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 V. If the stock's beta -Select- V New stock's required rate of return will be %.
stock has a required return of 8%, the risk-free rate is 3.5%, and the market risk premium is 3%. a. What is the stock's beta? Round your answer to two decimal places. b. If the market risk premium increased to 8%, 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 greater than 1.0, then the change in required rate of return will be less 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 greater than the change in the market risk premium. III. 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. greater than 1.0, then the change in required rate of return will be greater than the change in the market risk premium. less 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 V. If the stock's beta -Select- V New stock's required rate of return will be %.
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
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PLEASE ANSWER EACH PART CORRECTLY PLEASE!! go over
Transcribed Image Text:### Understanding Stock Beta and Required Rate of Return
A stock has a required return of 8%, the risk-free rate is 3.5%, and the market risk premium is 3%.
#### a. What is the stock's beta?
- Calculate the beta and round your answer to two decimal places.
#### b. Impact of Changing Market Risk Premium
If the market risk premium increased to 8%, analyze the change in the stock's required rate of return. Assume the risk-free rate and the beta remain unchanged. Avoid rounding intermediate calculations, and round your final answer to two decimal places.
**Scenarios:**
1. **If the stock’s beta is greater than 1.0:**
- The change in required rate of return will be less than the market risk premium change.
2. **If the stock’s beta is equal to 1.0:**
- The change in required rate of return will be equal to the market risk premium change.
3. **If the stock’s beta is equal to 1.0:**
- The change in required rate of return will be less than the market risk premium change.
4. **If the stock’s beta is greater than 1.0:**
- The change in required rate of return will be greater than the market risk premium change.
5. **If the stock’s beta is less than 1.0:**
- The change in required rate of return will be greater than the market risk premium change.
**Selection needed:**
- Choose the correct scenario from the list.
**Result:**
- New stock's required rate of return will be ________ %.
This exercise helps to understand how changes in market risk premium affect a stock's required rate of return, taking into account its beta value.
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