Question

Assume that the risk-free rate is 8 percent, the required rate of return on the market (or an average-risk stock) is 13 percent, and the required rate of return on Acme Healthcare stock is 15 percent. What is the implied beta coefficient of the stock? (Hint: Use the SML equation with beta as the unknown.)

Answer 1

Answer:

22.7 %

Explanation:

We can solve two of the problems using Capital Asset Pricing Model (CAPM) which is as follows:

Ra= Rf + (Rm-Rf)*B

Where,

Ra= Rate of return on stock

Rm= Rate of return on market

Rf= Risk Free rate

B= Beta coefficient of stock

Now we can move for your problem

Prob1) Ra= .15, Rf= .08, Rm= .13, B= ?

.15=.08+(.13-.08)B

Therefore, beta Coefficient = 1.4              

Prob2: Ra= ?, Rf= .04, Rm= .15, B=1.7

= .04+(.15-.04)*1.7

Therefore, Ra=0.227 = 22.7 %