Answer:
The difference between A's and B's required rate of return is 1.95% with B's required rate of return being 1.95% higher than A's.
Explanation:
The required rate of return is the minimum return that investors require to invest in a stock. Using CAPM, we can calculate the required rate of return on a stock using the following formula,
r = rRF + Beta of Stock * (rM - rRF)
Where,
- rRF is the risk free rate
- rM is the expected return on market
For company A, r = 0.045 + 0.9 * (0.11 - 0.045) = 0.1035 or 10.35%
For company B, r = 0.123 or 12.30%
The difference between A's and B's required rate of return is,
Difference = 12.30% - 10.35% = 1.95% with B's required rate of return being 1.95% higher than A's.
