Consider a stock with a beta of 1.6. What is the stock's equilibrium required rate of return?
The correct answer is option E: 20.0%
The capital asset pricing model (CAPM) can be used to calculate the equilibrium required rate of return for a stock. The CAPM formula is:
r = Rf + beta x (Rm - Rf)
Where:
r = required rate of return
Rf = risk-free rate
beta = beta of the stock
Rm = expected market return
Rm - Rf = market risk premium
Plugging in the values given in the question, we get:
r = 0.04 + 1.6 x 0.10
r = 0.04 + 0.16
r = 0.20 or 20%
Therefore, the correct answer is option E: 20.0%.
What is the formula for calculating the equilibrium required rate of return for a stock using the capital asset pricing model (CAPM)? The formula for calculating the equilibrium required rate of return for a stock using the capital asset pricing model (CAPM) is r = Rf + beta x (Rm - Rf), where r is the required rate of return, Rf is the risk-free rate, beta is the beta of the stock, Rm is the expected market return, and Rm - Rf is the market risk premium.