Assume that the risk-free rate is 8 percent, the required rate of return on the market (or an average-risk stock) is 13 percent, and the required rate of return on Acme Healthcare stock is 15 percent. What is the implied beta coefficient of the stock? (Hint: Use the SML equation with beta as the unknown.)

Question

Business

Nitro

5 April, 09:45

Assume that the risk-free rate is 8 percent, the required rate of return on the market (or an average-risk stock) is 13 percent, and the required rate of return on Acme Healthcare stock is 15 percent. What is the implied beta coefficient of the stock? (Hint: Use the SML equation with beta as the unknown.)

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Answers (1)

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Louis Charles · Answer 1

22.7 %

Explanation:

We can solve two of the problems using Capital Asset Pricing Model (CAPM) which is as follows:

Ra = Rf + (Rm-Rf) * B

Where,

Ra = Rate of return on stock

Rm = Rate of return on market

Rf = Risk Free rate

B = Beta coefficient of stock

Now we can move for your problem

Prob1) Ra=.15, Rf=.08, Rm=.13, B=?

.15=.08 + (.13-.08) B

Therefore, beta Coefficient = 1.4

Prob2: Ra=?, Rf=.04, Rm=.15, B=1.7

=.04 + (.15-.04) * 1.7

Therefore, Ra=0.227 = 22.7 %