Required Rate of Return with a Stock in Equilibrium
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You are holding a stock which is currently in equilibrium. The required rate of return on the stock is 15 percent when the required return on an average stock is 10 percent. What will be the percentage change in the required return on the stock if the required return on an average stock increases by 30 percent while the risk-free rate is unchanged? Your stock has a beta of 2.
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Solution Summary
This solution contains calculations to aid you in understanding the required rate of return with a stock in equilibrium.
Solution Preview
By CAPM, Required rate of return is
Rr = Rf + Beta * (Rm-Rf)
Rf = risk free rate
Rm = ...
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