USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

question 122

Multiple Choice

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You expect the risk-free rate (RFR) to be 3 percent and the market return to be 8 percent. You also have the following information about three stocks.

-Refer to Exhibit 7.2. What are the expected (required) rates of return for the three stocks (in the order X, Y, Z) ?

• A) 16.50 percent, 5.50 percent, 22.00 percent
• B) 9.25 percent, 10.5 percent, 7.5 percent
• C) 21.25 percent, 8.33 percent, 11.43 percent
• D) 6.20 percent, 2.20 percent, 8.20 percent
• E) 15.00 percent, 3.50 percent, 7.30 percent

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Definitions:

Market Risk Premium

The additional return an investor requires for holding a risky market portfolio instead of risk-free assets, reflecting the extra risk.

Required Return

The minimum expected return by investors for investing in a particular asset, considering the risk associated with it.

Beta

It is a measure of a stock's volatility in relation to the overall market, indicating the stock's relative risk.

Risk-free Rate

The return on investment with no risk of financial loss, typically associated with government bonds.