USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You expect the risk-free rate (RFR) to be 4 percent and the market return to be 10 percent. You also have the following information about three stocks.

-Refer to Exhibit 7.7. What are the required rates of return for the three stocks (in the order A, B, C)?
A) 13.0 percent, 10.6 percent, 8.8 percent
B) 15.0 percent, 11.1 percent, 2.9 percent
C) 18.7 percent, 11.1 percent, 8.8 percent
D) 21.7 percent, 10.0 percent, 6.9 percent
E) 25.0 percent, 11.1 percent, 7.1 percent

Question

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You expect the risk-free rate (RFR) to be 4 percent and the market return to be 10 percent. You also have the following information about three stocks.
 
-Refer to Exhibit 7.7. What are the required rates of return for the three stocks (in the order A, B, C)?
A) 13.0 percent, 10.6 percent, 8.8 percent 
B) 15.0 percent, 11.1 percent, 2.9 percent 
C) 18.7 percent, 11.1 percent, 8.8 percent 
D) 21.7 percent, 10.0 percent, 6.9 percent 
E) 25.0 percent, 11.1 percent, 7.1 percent

Quizplus · Accepted Answer

The required rate of return for Stock A is calculated as RFR + beta(A) x [Market return - RFR] = 4% + 1.2 x (10% - 4%) = 13.0%
The required rate of return for Stock B is calculated as RFR + beta(B) x [Market return - RFR] = 4% + 0.8 x (10% - 4%) = 10.6%
The required rate of return for Stock C is calculated as RFR + beta(C) x [Market return - RFR] = 4% + 0.4 x (10% - 4%) = 8.8%