5. Problem 8.05 (beta and required rate of return)

A stock has a required return of 8%, the risk free rate is 2.5%, and the market risk premium is 4%.

a. What is the stocks better? Round your answer to two decimal places

b. If the market risk premium increased to 8%, what would happen to the stocks required rate of return? Assume that the risk free rate and the beta remain unchanged. Do not round intermediate calculations. Round your answer to two decimal places. (select one)

I. If the stocks beta is less than 1.0, then the change in required rate of return will be greater than a change in the market risk premium.

II. If the stocks beta is greater than 1.0, then the change in required rate of return will be less than the change in the market risk premium.

III. If the stocks beta is equal to 1.0, and the change in required rate of return, it will be greater than the change in the market risk premium.

IV. If the stocks beta is equal to 1.0, then the change in required rate of return, it will be less than the change in the market risk premium.

V. If the stocks beta is greater than 1.0, then the change in required rate of return will be greater than the change in the market risk premium.

c. stocks, required rate of return will be _____%?

(yawin: 1) Stikes requied rak at retum wit be