8-5 BETA AND REQUIRED RATE OF RETURN A stock has a required return of 9%, the risk-free rate is 4.5%, and the market risk premium is 3%. a. What is the stock's beta? b. If the market risk premium increased to 5%, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged. 8-6 EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns: Probability A B 0.1 (10%) (35%) 0.2 2 0 0.4 0.2 0.1 222 12 20 20 25 38 45 a. Calculate the expected rate of return, f, for Stock B ( = 12%). b. Calculate the standard deviation of expected returns, , for Stock A ( = 20.35%). Now calculate the coefficient of variation for Stock B. Is it possible that most investors will regard Stock B as being less risky than Stock A? Explain. c. Assume the risk-free rate is 2.5%. What are the Sharpe ratios for Stocks A and B? Are these calculations consistent with the information obtained from the coefficient of variation calculations in part b? Explain.