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23 August, 15:18

Stock R has a beta of 1, Stock S has a beta of 0.45, 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.

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  1. 23 August, 16:15
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    3.00%

    Explanation:

    Required return of a stock = Risk free rate of return + (average required return - Risk free rate of return) (Beta of the stock)

    Required return of Stock R = 0.03 + [ (0.09 - 0.03) * 1) ] = 0.09

    Required return of Stock S = 0.03 + [ (0.09 - 0.03) * 0.45) ] = 0.06

    Difference = 0.09 - 0.06 = 0.03, or 3%

    Therefore, the required return on the riskier stock will exceed the required return on the less risky stock by 3.00%.
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