stock you are holding has a beta of 2.0 and the stock is currently in equilibrium The required rate of return on the stock is 15% versus a required return on an average stock of 10% Now the required return on an average stock increases by 30.0% (not percentage points) The risk-free rate is unchanged By what percentage (not percentage points) would the required return on your stock increase as a result of this event?
A) 36.10%
B) 38.00%
C) 40.00%
D) 42.00%
E) 44.10%

Question

Quizplus · Accepted Answer

The required return on an average stock increases by 30%, so the new required return is 10% * 1.30 = 13%. The stock's beta is 2.0, so the increase in the required return for your stock is 2.0 * (13% - 10%) = 6%. The original required return was 15%, so the new required return is 15% + 6% = 21%. The percentage increase is (21% - 15%) / 15% = 40%.

Stock You Are Holding Has a Beta of 2