Stock Z has a standard deviation of 18% and a covariance with the market of 0.0625.The expected return of the market is 13 with a standard deviation of 20%.The risk-free rate is 5%.What is the required return of Stock Z?
A)7.50%
B)7.78%
C)17.50%
D)20.43%

Question

Quizplus · Accepted Answer

The required return of Stock Z can be calculated using the Capital Asset Pricing Model (CAPM) formula: Required Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Beta is calculated as the covariance of the stock with the market divided by the variance of the market. Here, Beta = 0.0625 / (0.20)^2 = 1.5625. Plugging the values into the CAPM formula gives: Required Return = 5% + 1.5625 * (13% - 5%) = 17.50%.

Stock Z Has a Standard Deviation of 18% and a Covariance