Purchase Solution

Stocks : Required Rate of Return and Expected Return

Not what you're looking for?

Ask Custom Question

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. What is the expected return on the market?
c. If based on your personal opinion the stock will generate a return of 20%, is the stock over-valued or under-valued? Would you buy or sell the stock?

Purchase this Solution
Solution Summary

This solution explains how to calculate required rate of return and expected return on the market for a stock given the beta value, market risk premium, and the risk-free rate.

Solution Preview

Part A:

To find the required rate of return on a stock, you need to use the following formula:
Required Rate of Return = Risk Free Rate + (Beta * Market Risk Premium)

Now you plug in the numbers you already know:
Required Rate of Return = 5% + (1.5 * 9%)
Required Rate ...

Purchase this Solution
Free BrainMass Quizzes
Know Your Statistical Concepts

Each question is a choice-summary multiple choice question that presents you with a statistical concept and then 4 numbered statements. You must decide which (if any) of the numbered statements is/are true as they relate to the statistical concept.

Measures of Central Tendency

This quiz evaluates the students understanding of the measures of central tendency seen in statistics. This quiz is specifically designed to incorporate the measures of central tendency as they relate to psychological research.

Measures of Central Tendency

Tests knowledge of the three main measures of central tendency, including some simple calculation questions.

Terms and Definitions for Statistics

This quiz covers basic terms and definitions of statistics.

View More Free Quizzes
Related BrainMass Solutions

  • Required rate of return and investment strategy

    This posting calculates the required rate of return on three stocks and the current expected rate of return and suggests the correct investment strategy to take advantage of the mis-pricing on the stock market.

  • CAPM and Beta of Stocks

    179035 Use a CAPM analysis to choose between Stocks R and S You have been asked to use a CAPM analysis to choose between Stocks R and S, with your choice being the one whose expected rate of return exceeds its required return by the widest margin.

  • Rates of Return and Equilibrium

    Explain, and describe what would happen if the stock were not in equilibrium. If the risk free rate is 9% and the expected rate of return on an average stock is 13%, what are the requried rates of return on stocks c and d?

  • Find the required rate of return

    207928 Find the required rate of return 2. If RF = 6 percent, b= 1.3, and the ERP = 6.5 percent, compute Ke (the required rate of return).

  • Stock Beta and Required Return on Stock

    119735 1) Stock a has a beta of 1.5 and Stock b has a beta of 0.5. The market is in equilibrium, with required returns equaling expected returns. Which of the following statements is CORRECT? 2) The risk-free rate is 5%.

  • Required rate of return and market price of the stock

    If the risk-free rate is 7 percent and the expected rate of return on an average stock is 11 percent, what are the required rates on Stocks C and D? b.

  • Finance Problems: Required Rate of Return

    590670 Finance Problems: Required Rate of Return 2. Required Rate of Return AA Industries stock has a beta of 0.8. The risk-free rate is 4% and the expected return on the market is 12%. What is the required rate of return on AA's stock? 10.

  • Return on stocks

    The required return on Chapman Tech's stock is 11% and its dividend is expected to grow at a constant rate of 7% per year. - Rust Petroleum is expected to pay a $1.50 dividend at the end of the year.

  • Multiple Choice

    there is no relationship between the expected return of the portfolio and the expected return of the stocks. None of the above. 5.

  • Portfolio return, Stock return, Leverage

    272317 Portfolio expected return, expected rate of return on the company's stock, effect of changes in inflation and market risk premium on return on stocks, operating net cash, leverage Question 11: Stock A has a beta of 0.8, Stock B has a beta of

View More Related Solutions