Subject: Financial strategy & policy 8-5: BETA AND REQUIRED RATE OF RETURN A stock has a required return of 11%, the risk-free rate is 7%, and the market risk premium is 4%. a. What is the stock’s beta? b. If the market risk premium increased to 6%, what would happen to the stock’s required rate of return? Assume that the risk-free rate and the beta remain unchanged. 8-8: BETA COEFFICIENT Given the following information, determine the beta coefficient for Stock J that is consistent with equilibrium: ^rJ ¼ 12.5%; rRF ¼ 4.5%; rM ¼ 10.5%.
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Subject: Financial strategy & policy
8-5: BETA AND REQUIRED
a. What is the stock’s beta?
b. If the market risk premium increased to 6%, what would happen to the stock’s required rate of return? Assume that the risk-free rate and the beta remain unchanged.
8-8: BETA COEFFICIENT Given the following information, determine the beta coefficient for Stock J that is consistent with equilibrium: ^rJ ¼ 12.5%; rRF ¼ 4.5%; rM ¼ 10.5%.
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