suppose risk free rate is 5 return on market is 11 and r

suppose risk free rate is 5 % , return on market is 11 % , and return on stock B is 14 % . a Calculate Stock B\'s beta, B.marvin has investments with the following characteristics in his protfolio

expect inv amount return Invested
abc 30% 10k
efg 16% 50k
qrp 20% 40k

suppose risk free rate is 5 % , return on market is 11 % , and return on stock B is 14 % . a Calculate Stock B\'s beta, B.?

if Stock B\'s beta were 1.5, what would be B\'s new required rate of return?

Solution

a.

Risk free rate = 5%

Market return = 11%

Risk Premium = 11% - 5%

                        = 6%

Expected return = 14%

Beta is calculated below using CAPM model:

Expected rate of return = Risk free rate + Risk Premium × Beta

                             14% = 5% + (6% × beta)

                               9% = 6% × beta

                             Beta = 1.50

Beta of company is 1.50.

So, if Beta of cmpany is 1.50 then required rate of return is 14%.