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Stock R has a beta of 1.3, Stock S has a beta of 0.65, the expected rate of return on an average stock is 10%, and the risk-free rate is 4%. By how much does the required return on the riskier stock exceed that on the less risky stock

Respuesta :

Stock R

AS per CAPM

expected return = risk free

Rate+ beta *(expected return on market - risk free rate )

expected return % =6+1.3*

(13-6)

Expected return % =15.1

Stock S

expected return = risk free

Rate+ beta *(expected return on market - risk free rate )

expected return % = 6+0.65*

(13-6)

expected return %=10.55

Difference =15.1-10.55

Difference =4.55%

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