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?
The beta of the average stock is 1 and the beta of this stock is 2. Thus, if X equals the market premium,
Using algebra to subtract the formula for the return ...
This solution illustrates the Capital Asset Pricing Model.