Stock R has a beta of 1.5, Stock S has a beta of 0.85, the required return on an average stock is 9%, and the risk- free rate of return is 5%. By how much does the required return on the riskier stock exceed the required return on the less risky stock? Round your answer to two decimal places. %
Stock R has a beta of 1.5, Stock S has a beta of 0.85, the required return on an average stock is 9%, and the risk- free rate of return is 5%. By how much does the required return on the riskier stock exceed the required return on the less risky stock? Round your answer to two decimal places. %
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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Transcribed Image Text:Stock R has a beta of 1.5, Stock S has a beta of 0.85, the required return on an average stock is 9%, and the risk-
free rate of return is 5%. By how much does the required return on the riskier stock exceed the required return on
the less risky stock? Round your answer to two decimal places.
%
Expert Solution
Step 1
Investors want to be compensated for risk and time worth of money. The risk-free rate in the CAPM calculation accounts for the time value of money. The other components of the CAPM formula accommodate the investor's higher risk. An indicator of how much risk a possible investment will add to a portfolio that resembles the market is its beta. A stock will have a beta value greater than one if it is riskier than the market. The formula implies that a stock will lower a portfolio's risk if its beta value is less than one.
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