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Assume that the risk-free rate is 6% and that the expected return on the market is 13%. What is the required rate of return on a stock Answer

Assume that the risk-free rate is 6% and that the expected return on the market is 13%. What is the required rate of return on a stock that has a beta of 0.7?

Ans:

Expected return on the market = 13 %

Market Risk Premium = Expected return on the market – risk-free rate

Market Risk Premium = 13% – 6% = 7%

Required rate of return on a stock = Rf + ( Rm – Rf) * beta

Required rate of return on a stock = 0.06 + ( 0.13-0.06) * 0.7 = 0.06 + 0.07 *0.7

= 0.06 + 0.049 = 0.109 = 10.9%

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