**Problem Statement:**Stock R has a beta of 2.0, Stock S has a beta of 0.35, the required return on an average stock is 9%, and the risk-free rate of return is 3%. 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.**Solution Explanation:**To calculate the required return on each stock, we use the Capital Asset Pricing Model (CAPM), which is given by the formula:\[ \text{Required Return} = \text{Risk-free Rate} + \beta \times (\text{Market Return} - \text{Risk-free Rate}) \]**For Stock R:**- Beta (\(\beta_R\)) = 2.0- Risk-free Rate = 3%- Market Return = 9%- Required Return for Stock R = \(3\% + 2.0 \times (9\% - 3\%) = 3\% + 2.0 \times 6\% = 3\% + 12\% = 15\%\)**For Stock S:**- Beta (\(\beta_S\)) = 0.35- Risk-free Rate = 3%- Market Return = 9%- Required Return for Stock S = \(3\% + 0.35 \times (9\% - 3\%) = 3\% + 0.35 \times 6\% = 3\% + 2.1\% = 5.1\%\)**Difference in Required Returns:**The difference in the required return between the riskier stock (Stock R) and the less risky stock (Stock S) is:\[ 15\% - 5.1\% = 9.9\% \]Thus, the required return on the riskier stock exceeds the required return on the less risky stock by **9.9%**.

Stock R beta (BR) = 2.0 Stock S beta (BS) = 0.35 Risk free rate (RF) = 3% Market rate of return (RM)…

Answered: Stock R has a beta of 2.0, Stock S has…

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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Stock R has a beta of 2.0, Stock S has a beta of 0.35, the required return on an average stock is 9%, and the risk-free rate of return is 3%. 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. %