Question

Stock D has a beta coefficient of 1.5 making it slightly more variable than the overall stock market. The stock market in this case has an average rate of return of 10.0% (with dividends reinvested). The average rate of return on default risk free government securities is 3%. Calculate the required rate of return that stock D must possess to make it worthwhile to purchase it.

Answer 1

Required rate of return = Return on risk-free securities + Beta x (Market average return - Return on risk-free securities)

= 3% + 1.5 x (10% - 3%)

= 3% + 1.5 x 7%

= 3% + 10.5%

= 13.5%