   Chapter 8, Problem 8P Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Solutions

Chapter
Section Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

BETA COEFFICIENT Given the following information determine the beta coefficient for Stock J that is consistent with equilibrium: r ^ J = 12.5%; rRF = 4.5%; rM = 10.5%.

Summary Introduction

To determine: The beta coefficient.

Beta Coefficient:

The beta coefficient is a value used in the capital asset pricing model (CAPM) to find out the return, which is required on an investment. This coefficient measures whether the investment is less or more volatile in the market.

Explanation

Given,

The required return on the stock is 12.5%.

The risk-free rate is 4.5%.

The required rate of return on market is 10.5%.

Compute the value of beta coefficient.

The formula to calculate the beta coefficient is,

bstock=(rstockrRF)(rMrRF)

Where,

• rstock is the required return on the stock.
• rRF is the risk-free return.
• rM is the market risk premium

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