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ANTONII [103]
3 years ago
8

You are holding a stock that has a beta of 1.85 and is currently in equilibrium. The required return on the stock is 28.95%, and

the return on the market portfolio is 18.00%. What would be the new required return on the stock if the return on the market increased to 25.00% while the risk-free rate and beta remained unchanged
Business
1 answer:
Karo-lina-s [1.5K]3 years ago
3 0

Answer: 41.90%

Explanation:

First calculate the risk free rate:

Required return = risk free rate + beta * (Market return - risk free rate)

28.95% = rf + 1.85 * (18% - rf)

28.95% = rf + 33.3% - 1.85rf

28.95% = -0.85rf + 33.3%

0.85rf = 33.3% - 28.95%

rf = 4.35%/0.85

rf = 5.12%

New required return;

Required return = risk free rate + beta * (Market return - risk free rate)

= 5.12% + 1.85 * (25% - 5.12%)

= 41.90%

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