Stock R has a beta of 1.5, Stock S has a beta of 0.75, the expected rate ofreturn on an average stock is 13%, and the risk-free rate is 7%. By howmuch does the required return on the riskier stock exceed that on the lessrisky stock?
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.
Stock R has a beta of 1.5, Stock S has a beta of 0.75, the expected rate of
return on an average stock is 13%, and the risk-free rate is 7%. By how
much does the required return on the riskier stock exceed that on the less
risky stock?
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