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17 January, 13:52

Stock r has a beta of 1.5, stock s has a beta of 0.75, the expected rate of return on an average stock is 13%, and the risk-free rate is 7%. by how much does the required return on the riskier stock exceed that on the less risky stock? answer

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  1. 17 January, 17:02
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    4.5%

    Explanation:

    The formula to compute the expected rate of return under the CAPM model is shown below:

    Expected rate of return = Risk-free rate of return + Beta * (Market rate of return - Risk-free rate of return)

    For stock r, the required rate of return is

    = 7% + 1.5 * (13% - 7%)

    = 7% + 1.5 * 6%

    = 16%

    For stock s, the required rate of return is

    = 7% + 0.75 * (13% - 7%)

    = 7% + 0.75 * 6%

    = 11.5%

    So, the difference of required rate of return is

    = 16% - 11.5%

    = 4.5%

    The Stock R has high riskier stock whereas the stock S has less riskier stock due to beta
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