1) Suppose the market return is 8%, the risk-free rate is 1% and the beta for a given stock is 1.2. Answer the following questions based on this information:
A. What is the required return for this stock?
B. If the beta increases by 50% (but beta remains at 1.2), what will be the new required return for the stock? What is the percentage-wise change in required return compared to your answer to A) above?
C. If the market return increases by 50% (but beta remains at 1.2), what will be the new required return for the stock? What is the percentage-wise change in required return compared to your answer to A) above?
2) Suppose there are three different companies. The first one, Trendy Tech Inc., has investors who are “fair-weather friends.” When the stock market is going up, everybody wants to invest in Trendy Tech, but as soon as the market goes down everyone jumps ships and sells their shares. The second company is Oily Oil Inc. Oily’s stock price seems to depend only on the price of oil and nothing else. Finally, there is Conglomerated Conglomerate Inc. Conglomerated is a giant company with holdings in almost every industry imaginable—from cell phones to grocery stores and even amusement parks. Based on this information, which company would you think has the highest beta? The lowest beta? Which one do you think has a beta closest to 1?