MGT201 Solution

a) What do you require the return on your stock?

Beta = 0.6

Risk free rate = 10%

Risk premium = 5%

Required rate of return =?

rA = rRF + (rM – rRF) βA

= 10% + (5%)*.6

= 13%

b) Comment whether you will still hold the stock, if the market return is 15%?

rM = 15%

rA = rRF + (rM – rRF) βA

= 10% + (15% - 10%).6

= 13%

stock is less risky then market so I will hold the stock