Purchase Solution

Required Rate of Return

Not what you're looking for?

Ask Custom Question

Suppose the following:

Risk Free Rate of Return = 9%

Required Rate of Return on a Market Portfolio = 14%

Beta = 1.3

Suppose the risk free rate of return (1) increases to 10 percent or (2) decreases to 8 percent. The slope of the SML remains constant. How would this affect the required rate of return on a market portfolio and the required rate of return on a stock?

Answers (1) rM = 15% ; ri = 16.5%

(2) rM = 13% ; ri = 14.5%

I do not understand how to arrive at the answers.

Purchase this Solution
Solution Summary

The solution explains how to calculate the required rate of return on market and stock.

Solution Preview

The slope of the SML is (Market Return - Risk free rate)
The exisiting slope of the SML is 14%-9%=5%
The required return on the stock = ...

Purchase this Solution
Free BrainMass Quizzes
Learning Lean

This quiz will help you understand the basic concepts of Lean.

Basic Social Media Concepts

The quiz will test your knowledge on basic social media concepts.

Marketing Research and Forecasting

The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.

Lean your Process

This quiz will help you understand the basic concepts of Lean.

Operations Management

This quiz tests a student's knowledge about Operations Management

View More Free Quizzes
Related BrainMass Solutions

  • Stock questions

    What is the required rate of return on a stock with a beta of 0.7? 8- 5 BETA AND REQUIRED RATE OF RETURN A stock has a required return of 11%, the risk- free rate is 7%, and the market risk premium is 4%. a. What is the stock's beta? b.

  • Rate of return, growth rate, return on equity

    rate of return = $2.7016 Required rate of return = .087148 Required rate of return = 8.71 percent b.

  • Required return

    What is the required rate of return on a stock with a beta of 0.7? 8-5 BETA AND REQUIRED RATE OF RETURN A stock has a required return of 11%, the risk-free rate is 7%, and the market risk premium is 4%. a. What is the stock's beta? b.

  • Stocks : Required Rate of Return and Expected Return

    235871 Determining Required Rate of Return and Expected Return: Example A stock has a beta of 1.5, the market risk premium is 9%, and the risk-free rate is 5%. a. What is the required rate of return on this stock? b.

  • Nominal required rate of return

    Hence there is a need of change in nominal required rate of return as the real rate of return will go down if there is increase in inflation with no increase in nominal required rate of return.

  • Cost of Capital with Flotation Costs

    So, Required rate of return=(Next dividend/(Price of stock-flotation cost per share))+growth rate Required rate of return=($1.75/($35-$1.75))+.07 Required rate of return=($1.75/$33.25)+.07 Required rate of return=0.0526+.07 Required rate of return

  • Calculating WACE

    )/(Required rate of return - .06) $52.50 = $2.65/(Required rate of return - .06) ($52.50*Required rate of return) - ($52.50*.06) = $2.65 ($52.50*Required rate of return) - $3.15 = $2.65 ($52.50*Required rate of return) = $5.80 Required rate of return

  • required return

    If the risk free rate rises to 9%, what will the required rate of return on the company's stock? = 9%+1.3*(14%-8%) =16.8% III. If the beta of this company were 0.8, what would the its required rate of return?

  • How to calculate - Rate of Return, CAPM

    112953 How to calculate - Rate of Return, CAPM 1. Required rate of return: Stock R has a beta of 1.5, Stock S has a beta of 0.75, the expected rate of return on an average stock is 13 percent, and the risk-free rate of return is 7 percent.

View More Related Solutions