Computation of return on stock using CAPM approach.
1. Parr Paper's stock has a beta of 1.40, and its required return is 13.00%. Clover Dairy's stock has a beta of 0.80. If the risk-free rate is 4.00%, what is the required rate of return on Clover's stock? (Hint: First find the market risk premium.)
a. 8.55%
b. 8.71%
c. 8.99%
d. 9.14%
e. 9.33%
2. Stock A has a beta of 0.8 and Stock B has a beta of 1.2. Fifty percent of Portfolio P is invested in Stock A and fifty percent is invested in Stock B. If the market risk premium (rM rRF) were to increase but the risk-free rate (rRF) remained constant, which of the following would occur?
a. The required return will decrease by the same amount for both Stock A and Stock B.
b. The required return will increase for both stocks but the increase will be greater for Stock B than for Stock A. 2
c. The required return will increase for Stock A but will decrease for Stock B.
d. The required return will increase for Stock B but will decrease for Stock A.
e. The required return on Portfolio P will remain unchanged.
3. Other things held constant, if the expected inflation rate decreases and investors also become more risk averse, the Security Market Line would shift
a. down and have a less steep slope.
b. up and have a less steep slope.
c. up and keep the same slope.
d. down and keep the same slope.
e. down and have a steeper slope.