An analyst uses the capital asset pricing model (CAPM) to measure the required return on two stocks, X and Y. The expected market rate of return is 12... Accounting MCQs | Accounting MCQs

An analyst uses the capital asset pricing model (CAPM) to measure the required return on two stocks, X and Y. The expected market rate of return is 12%, the risk-free rate of return is 4%, the beta (?) coefficient of stock X is 0.5, and the beta (?) coefficient of stock Y is 2.0. The required returns of the two stocks are

6% for stock X and 24% for stock Y.
4% for stock X and 16% for stock Y.
8% for stock X and 32% for stock Y.
8% for stock X and 20% for stock Y.Show Result

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Detailed Answer

Answer (D) is correct. The formula for the required rate of return is the risk-free rate of return plus beta times the market risk premium. The market risk premium is the market rate of return minus the risk-free rate of return. Thus, the required rate of returns are calculated as follows:
Required rate of return for X = 4% + .5 × (12% – = 4% )
=4% + .5 × (8%)
=4% + 4%
=8%
Required rate of return for Y = 4% + 2.0 × (12% – 4%)
= 4% + 2.0 × (8%)
= 4% + 16%
=20%