Stock X has a standard deviation of 25% and a correlation coefficient of 0.7 with market returns.The expected return of the market is 12% with a standard deviation of 15%.The risk-free rate is 5%.What is the required return of Stock X?
A)7.94%
B)9.56%
C)13.17%
D)15.28%

Question

Quizplus · Accepted Answer

The required return of Stock X can be calculated using the Capital Asset Pricing Model (CAPM) formula: Required Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Beta is calculated as (Correlation Coefficient * Standard Deviation of Stock X) / Standard Deviation of Market = (0.7 * 25%) / 15% = 1.1667. Plugging the values into the CAPM formula gives: 5% + 1.1667 * (12% - 5%) = 13.17%.

Stock X Has a Standard Deviation of 25% and a Correlation