Company A has a beta of 0.70, while Company B's beta is 1.20. The required return on the stock market is 11.00%, and the risk-free rate is 4.25%. What is the difference between A's and B's required rates of return?
A) 2.75%
B) 2.89%
C) 3.05%
D) 3.38%

Question

Quizplus · Accepted Answer

The required rate of return for Company A = 4.25% + 0.70(11.00% - 4.25%) = 8.53%
The required rate of return for Company B = 4.25% + 1.20(11.00% - 4.25%) = 14.03%
The difference in required rates of return = 14.03% - 8.53% = 5.50% = 5.50%/2 = 2.75% (assuming equal investment in both stocks)
Therefore, the answer is D.

Company a Has a Beta of 0