What is the required rate of return on the stock

Reference no: EM13269505

A stock that currently trades at $10 has a beta of 1.6. The risk-free interest rate for the is 10%, and the market price of risk is expected to be 5%.
a. What is the required rate of return on the stock?
b. Demonstrate graphically the disparity between the required return and the expected return on the stock, if that expected return is 20%. (Hint: Use the SML)
c. Explain the forces that can be expected to bring the market back into equilibrium.

Reference no: EM13269505

Questions Cloud

What is the frequency heard by the engineer on train : Two trains on separate tracks move toward each other. Train 1 has a speed of 125 km/h; train 2 a speed of 84.0 km/h. What is the frequency heard by the engineer on train 1

How much wealth have you made or lost over the year : You have $10,000 to invest for one year and you decide to buy risk free Treasury Bills. Find the current rate of inflation, the yield on T-Bills, your tax rate is 40%. How much wealth have you made or lost over the year? Comment.

What is the average power generated by the horn : A train sounds its horn as it approaches an intersection. The horn can just be heard at a level of 54 dB by an observer 10 km away. What is the average power generated by the horn

Evaluate the final temperature of the water after ice melts : Two 20.0-g ice cubes at -21.0 °C are placed into 235 g of water at 25.0 °C. Assuming no energy is transferred to or from the surroundings, calculate the final temperature of the water after all the ice melts.

What is the required rate of return on the stock : A stock that currently trades at $10 has a beta of 1.6. The risk-free interest rate for the is 10%, and the market price of risk is expected to be 5%.

Find what is the range of possible values of p : Suppose you don't know the probability p of getting a ticket, but you got 5 tickets during the year, and you estimate p by the sample mean p =5/250= 0.02. What is the range of possible values of p assuming that the difference between p and the sam..

What is the velocity of the fluid in the narrow section : Water is flowing through a pipe with a constriction. The area of the narrow section is one-half the area of the wide section. what is the velocity of the fluid in the narrow section

Why is am commercial broadcast being replaced : SSB has an advantage over AM with respect to efficiency and power gain. Why, then, is AM commercial broadcast being replaced with SSB transmission

Illustrate the molecular formula of the compound : A compound is 42.9% C, 2.4% H, 16.7% N, and 38.1% O, by mass. Addition of 6.00 grams of this compound to 50.0 ml benzene, C6H6 (d = 0.879 g/mL), lowers the freezing point from 5.53 to 1.37 degrees celsius. What is the molecular formula of this com..

User Account

All Pages