A Stock’s Beta Is A Measure Of Its Unsystematic Risk. Systematic Risk. Company-Unique Risk Diversifiable Risk. The Risk-Free Rate Interest Is 4% And The Market Risk Premium Is 9% , Howard Corporation Has A Beta Of 2.0% The Required Return On Howard Corporation Stock Is 36%, 8)34%, 26%, 22%, Speculative, Or Non-Investment-Grade, Bonds Have An
The Correct Answer and Explanation is :
stock’s beta is a measure of its systematic risk.ystematic risk, also known as market risk, refers to the inherent risk that affects the entire market or a particular segment, such as economic recessions, political instability, or changes in interest rates.eta quantifies how much a stock’s price is expected to move in response to market fluctuations. beta of 1.0 indicates that the stock’s price tends to move in tandem with the market. beta greater than 1.0 suggests that the stock is more volatile than the market, while a beta less than 1.0 indicates less volatility.nsystematic risk, on the other hand, is specific to a company or industry and can be mitigated through diversification.
o determine the required return on Howard Corporation’s stock, we can use the Capital Asset Pricing Model (CAPM), which is expressed as:
[ \text{Required Return} = R_f + \beta \times (R_m – R_f) ]
Where:
- ( R_f ) is the risk-free rate- ( \beta ) is the stock’s beta- ( R_m ) is the expected market return
iven the following information:- isk-free rate (( R_f )): 4%- arket risk premium (( R_m – R_f )): 9%- oward Corporation’s beta: 2.0
lugging these values into the CAPM formula:
[ \text{Required Return} = 0.04 + 2.0 \times 0.09 ][ \text{Required Return} = 0.04 + 0.18 ][ \text{Required Return} = 0.22 \text{ or } 22\% ]
herefore, the required return on Howard Corporation’s stock is 22%.
his required return reflects the compensation investors demand for taking on the higher systematic risk associated with Howard Corporation’s stock, as indicated by its beta of 2.0. higher beta means the stock is more sensitive to market movements, leading investors to expect a higher return compared to less volatile stocks.
peculative or non-investment-grade bonds, often referred to as junk bonds, are debt securities rated below investment grade by credit rating agencies.hese bonds carry a higher risk of default compared to investment-grade bonds, and as a result, they offer higher yields to attract investors willing to accept the increased risk.nvestors should carefully assess their risk tolerance and investment objectives before considering speculative bonds, as their higher yields come with a greater potential for loss.
n summary, understanding a stock’s beta is crucial for investors to assess its sensitivity to market movements and to determine the appropriate required return using models like CAPM.dditionally, when evaluating speculative bonds, investors must weigh the potential for higher returns against the increased risk of default.