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Problem 8.04 (Expected and Required Rates of Return)

What is the required rate of return on a stock with a beta of \( 1.37 \)?

Round your answer to one decimal place.

Answer :

The required rate of return on a stock is the minimum return an investor expects to earn in order to justify the level of risk associated with that stock. In this case, we are given that the stock has a beta of 1.37.

The beta of a stock measures its sensitivity to market movements. A beta of 1 means the stock tends to move in line with the overall market, while a beta greater than 1 indicates the stock is more volatile than the market. In this case, the stock has a beta of 1.37, which means it is expected to be more volatile than the overall market.

To calculate the required rate of return, we can use the Capital Asset Pricing Model (CAPM), which is commonly used to estimate the expected return on an investment. The CAPM formula is:

Required Rate of Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate)

In this formula, the risk-free rate represents the return on a risk-free investment, such as a government bond. The market return is the expected return on the overall market.

Since we are not given the risk-free rate or the market return in the question, we cannot calculate the exact required rate of return. However, I can guide you through the steps to calculate it if you have those values.

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