Stock A's stock has a beta of 1.30, and its required return is 12.00%.Stock B's beta is 0.80.If the risk-free rate is 4.75%, what is the required rate of return on B's stock? (Hint: First find the market risk premium.)
A) 8.76%
B) 8.98%
C) 9.21%
D) 9.44%
E) 9.68%

Question

Quizplus · Accepted Answer

First, calculate the market risk premium using Stock A: Required return = Risk-free rate + Beta * Market risk premium. 12% = 4.75% + 1.30 * Market risk premium. Solving gives a market risk premium of 5.58%. Then, use this to find Stock B's required return: 4.75% + 0.80 * 5.58% = 9.21%.

Stock A's Stock Has a Beta of 1