stock r has a beta of 1.5 stock s has a beta of .75 the expected rate of return on an average stock is 13%, and the risk-free rate of return is 7%. By how much does the required return on the riskier stock exceed the required return on the less risky stock?
Subject: Fundamentals of Finance
Reading the chapter and trying to figure out the formula.
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The Required return on stock R = .07 + 1.5(.13-.07) = .16 = 16%
The Required return on stock S = .07 + .75(.13-.07) = .16 = .115 = 11.5%
So required return on the riskier stock exceed the required return on the less risky stock by 4.5% (16%-11.5%).
Post Graduate Diploma in Management (MBA)
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