Stock A's Stock Has a Beta of 1

question 7

Multiple Choice

Stock A's stock has a beta of 1.30,and its required return is 13.75%.Stock B's beta is 0.80.If the risk-free rate is 2.75%,what is the required rate of return on B's stock? (Hint: First find the market risk premium. ) Do not round your intermediate calculations.

• A) 9.33%
• B) 9.52%
• C) 10.66%
• D) 11.33%
• E) 8.57%

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Definitions:

Risk-Return Trade-Off

The principle that potential return on investment increases with the amount of risk undertaken in the investment.

Expected Returns

A projection of the amount of profit or loss an investment is likely to generate, factoring in various probabilities.

Higher-Risk Assets

Refers to investments that carry a greater possibility of losing value but offer a higher potential for financial rewards compared to lower-risk assets.

Derivative Security

A financial security whose value is derived from the value of an underlying asset, such as stocks, bonds, commodities, or currencies.