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Answered: - Assume that the risk-free rate is 4% and the market risk premium




Assume that the risk-free rate is 4% and the market risk premium is 5%. Given this information, which of the following statements is CORRECT?


a.

If a stock has a negative beta, its required return must also be negative.

b.

An index fund with beta = 1.0 should have a required return less than 9%.

c.

If a stock's beta doubles, its required return must also double.

d.

An index fund with beta = 1.0 should have a required return greater than 9%.

e.

An index fund with beta = 1.0 should have a required return of 9%.



2.Brodkey Shoes has a beta of 1.10, the ?T-bond rate is 5.5%. The annual return on the stock market during the past 3 years was 15.00%, but investors expect the annual future stock market return to be 14.00%. Based on the SML, what is the firm's required return?


 


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DATE ANSWERED

Oct 07, 2020

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