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Fiske Roofing Supplies' stock has a beta of 1.23, its required return is 11.75%, and the risk-free rate is 4.30%. What is the required rate of return on the market? (Hint: First find the market risk premium.) Select one:
a. 10.36%
b. 10.62%
c. 10.88%
d. 11.15%
e. 11.43%

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ahmedgodtrust

Answer:

ER(P) = Rf + β(Rm - Rf)

11.75 = 4.30 + 1.23(Rm - Rf)

11.75 - 4.30 = 1.23Rm -  5.289

7.45 + 5.289 = 1.23Rm

      12.739    = 1.23Rm

          Rm     = 12.739/1.23

          Rm     = 10.36%

Explanation: The expected return of a stock is a function of risk-free rate plus market risk premium. Market risk premium is equal to beta multiplied by risk premium. Risk premium is market return minus risk free rate.

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