Assume that the riskfree rate is 55 and the required return

Assume that the risk-free rate is 5.5% and the required return on the market is 12%. What is the required rate of return on a stock with a beta of 1? Round your answer to two decimal places.

Solution

This question is based on the CAPM equation, which can be stated as:

Required Return on Stock = Risk free rate + {Beta * (Expected Return on Market - Risk free rate)}

Required return on stock = 5.5% + (1 * (12 - 5.5%)) = 12% ---> Answer

This is also indicative from the Beta. Beta of this stock is 1. So its expected rate of return will be equal to that of market, which is 12%. For a stock with beta 0, expected return is equal to risk free rate. For stock with beta less than 1, expected return is less than that of market. For stock with beta more than 1, expected return is more than that of market.