Explore BrainMass

Explore BrainMass

    Stocks : Required Rate of Return and Expected Return

    Not what you're looking for? Search our solutions OR ask your own Custom question.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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?

    © BrainMass Inc. brainmass.com March 4, 2021, 9:20 pm ad1c9bdddf

    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 ...

    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.