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Stock A has a beta of 1
Stock A has a beta of 1.3, Stock Bhas a beta of 0.6, the required return on an average stock is 11%, and the risk-free rate of return is 5%. By how much does the required return on Stock A exceed the required return Stock B? CAPM AND REQUIRED RETURN Bradford Manufacturing Company has a beta of 1.2, while Farley Industries has a beta of 0.7. The required return on an index fund that holds the entire stock market is 11.0%. The risk-free rate of interest is 4%. By how much does Bradford's required return exceed Farley's required return?
Expert Solution
| As per CAPM |
| expected return = risk-free rate + beta * (expected return on the market - risk-free rate) |
| Expected return% = 5 + 1.3 * (11 - 5) |
| Expected return% = 12.8 |
| As per CAPM |
| expected return = risk-free rate + beta * (expected return on the market - risk-free rate) |
| Expected return% = 5 + 0.6 * (11 - 5) |
| Expected return% = 8.6 |
Differenc =12.8-8.6 =4.2%
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