When the return on the market portfolio goes up by 5%, the return on Stock A goes up on average by 8% and when the market portfolio return goes down by 5%, Stock A return goes down by 6%. a) Calculate the beta of this stock. b) Assuming that CAPM holds, calculate the required rate of return on this stock by assigning values for the risk-free rate and the expected return on the market portfolio depending on your own choice. (The use of the same risk-free rate and market return by different students will be treated as a cheat attempt).

Corporate Fin Focused Approach
5th Edition
ISBN:9781285660516
Author:EHRHARDT
Publisher:EHRHARDT
Chapter6: Risk And Return
Section: Chapter Questions
Problem 14P
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When the return on the market portfolio goes up by 5%, the return on Stock A goes up on
average by 8% and when the market portfolio return goes down by 5%, Stock A return goes down by 6%.
a) Calculate the beta of this stock.
b) Assuming that CAPM holds, calculate the required rate of return on this stock by assigning values for
the risk-free rate and the expected return on the market portfolio depending on your own choice. (The use
of the same risk-free rate and market return by different students will be treated as a cheat attempt).

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