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Required Rate of return between planes

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Company Alpha has a beta of 1.6, while Company Omega's beta is 0.7. The risk-free rate is 7%, and the required rate of return on the average stock is 12%. Now the expected rate of inflation built into krf rises by one percentage point, the real risk-free rate remains constant, the required rate on the market increases to 14%, and betas remain constant. After all of these changes have been reflected in the data, calculate by how much the required rate of return on Stock Alpha will exceed that on Stock Omega.
a. 3.75%

b. 4.20%

c. 4.82%

d. 5.40%

e. 5.75%

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The expert examines the required rate of return between planes.

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Reqd ROR = Risk free rate + beta(market rate - risk free rate)

Also Nominal Risk free rate = risk free rate * Inflation rate premium

Or ...

Solution provided by:
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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