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

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Solutions

Chapter
Section Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

BETA COEFFICIENT Given the following; information, determine the beta coefficient for Stock L that is consistent with equilibrium: r ^ L = 10-5%; rRF = 3.5%; TM = 9.5%.

Summary Introduction

To identify: The beta coefficient.

Beta Coefficient:

The beta coefficient is a value that is 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 10.5%.

The risk-free rate is 3.5%.

The required rate of return on market is 9.5%.

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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