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Percentage required return on stock to increase result of event

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You are holding a stock with a beta of 2.0 that is currently in equilibrium. The required rate of return on the stock is 15% versus a required return on an average stock of 10%. Now the required return on an average stock increases by 30.0% (not percentage points). The risk-free rate is unchanged. By what percentage (not percentage points) would the required return on your stock increase as a result of this event?

a. 36.10%

b. 38.00%

c. 40.00%

d. 42.00%

e. 44.10%

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Solution Preview

The beta of the average stock is 1 and the beta of this stock is 2. Thus, if X equals the market premium,

.15=Rf+2X
.10=Rf+ X

Using algebra to subtract the formula for the return ...

Solution Summary

This solution illustrates the Capital Asset Pricing Model.

$2.19