{"id":259979,"date":"2025-07-19T06:47:17","date_gmt":"2025-07-19T06:47:17","guid":{"rendered":"https:\/\/learnexams.com\/blog\/?p=259979"},"modified":"2025-07-19T06:47:19","modified_gmt":"2025-07-19T06:47:19","slug":"yahoo-finance-reported-the-following-market-betas-for-the-stocks-of-selected-health-insurers","status":"publish","type":"post","link":"https:\/\/www.learnexams.com\/blog\/2025\/07\/19\/yahoo-finance-reported-the-following-market-betas-for-the-stocks-of-selected-health-insurers\/","title":{"rendered":"Yahoo! Finance reported the following market betas for the stocks of selected health insurers"},"content":{"rendered":"\n<p>Yahoo! Finance reported the following market betas for the stocks of selected health insurers: Company Beta UnitedHealth Group 0.70 Humana 1.16 Aetna 0.63 Cigna 0.71 Assume that the risk-free rate, RF, and required rate of return on the market value, R(Rm), were 2.0 percent and 8.5 percent, respectively. What are the required return rates of return on the four stocks? Which of the stocks is riskiest for investors? Explain your answer.<\/p>\n\n\n\n<p><strong><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-ast-global-color-1-color\">The Correct Answer and Explanation is:<\/mark><\/strong><\/p>\n\n\n\n<p>To calculate the required rates of return for the stocks of the four companies, we can use the <strong>Capital Asset Pricing Model (CAPM)<\/strong>, which is given by the formula:Ri=Rf+\u03b2i\u00d7(Rm\u2212Rf)R_i = R_f + \\beta_i \\times (R_m &#8211; R_f)Ri\u200b=Rf\u200b+\u03b2i\u200b\u00d7(Rm\u200b\u2212Rf\u200b)<\/p>\n\n\n\n<p>Where:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>RiR_iRi\u200b is the required rate of return for the stock,<\/li>\n\n\n\n<li>RfR_fRf\u200b is the risk-free rate (2.0%),<\/li>\n\n\n\n<li>RmR_mRm\u200b is the expected return on the market (8.5%),<\/li>\n\n\n\n<li>\u03b2i\\beta_i\u03b2i\u200b is the beta of the stock.<\/li>\n<\/ul>\n\n\n\n<p>Let&#8217;s calculate the required returns for each company:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">1. <strong>UnitedHealth Group (Beta = 0.70)<\/strong><\/h3>\n\n\n\n<p>RUnitedHealth=2.0%+0.70\u00d7(8.5%\u22122.0%)=2.0%+0.70\u00d76.5%=2.0%+4.55%=6.55%R_{\\text{UnitedHealth}} = 2.0\\% + 0.70 \\times (8.5\\% &#8211; 2.0\\%) = 2.0\\% + 0.70 \\times 6.5\\% = 2.0\\% + 4.55\\% = 6.55\\%RUnitedHealth\u200b=2.0%+0.70\u00d7(8.5%\u22122.0%)=2.0%+0.70\u00d76.5%=2.0%+4.55%=6.55%<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">2. <strong>Humana (Beta = 1.16)<\/strong><\/h3>\n\n\n\n<p>RHumana=2.0%+1.16\u00d7(8.5%\u22122.0%)=2.0%+1.16\u00d76.5%=2.0%+7.54%=9.54%R_{\\text{Humana}} = 2.0\\% + 1.16 \\times (8.5\\% &#8211; 2.0\\%) = 2.0\\% + 1.16 \\times 6.5\\% = 2.0\\% + 7.54\\% = 9.54\\%RHumana\u200b=2.0%+1.16\u00d7(8.5%\u22122.0%)=2.0%+1.16\u00d76.5%=2.0%+7.54%=9.54%<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">3. <strong>Aetna (Beta = 0.63)<\/strong><\/h3>\n\n\n\n<p>RAetna=2.0%+0.63\u00d7(8.5%\u22122.0%)=2.0%+0.63\u00d76.5%=2.0%+4.10%=6.10%R_{\\text{Aetna}} = 2.0\\% + 0.63 \\times (8.5\\% &#8211; 2.0\\%) = 2.0\\% + 0.63 \\times 6.5\\% = 2.0\\% + 4.10\\% = 6.10\\%RAetna\u200b=2.0%+0.63\u00d7(8.5%\u22122.0%)=2.0%+0.63\u00d76.5%=2.0%+4.10%=6.10%<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">4. <strong>Cigna (Beta = 0.71)<\/strong><\/h3>\n\n\n\n<p>RCigna=2.0%+0.71\u00d7(8.5%\u22122.0%)=2.0%+0.71\u00d76.5%=2.0%+4.62%=6.62%R_{\\text{Cigna}} = 2.0\\% + 0.71 \\times (8.5\\% &#8211; 2.0\\%) = 2.0\\% + 0.71 \\times 6.5\\% = 2.0\\% + 4.62\\% = 6.62\\%RCigna\u200b=2.0%+0.71\u00d7(8.5%\u22122.0%)=2.0%+0.71\u00d76.5%=2.0%+4.62%=6.62%<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Summary of Required Returns:<\/h3>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>UnitedHealth Group<\/strong>: 6.55%<\/li>\n\n\n\n<li><strong>Humana<\/strong>: 9.54%<\/li>\n\n\n\n<li><strong>Aetna<\/strong>: 6.10%<\/li>\n\n\n\n<li><strong>Cigna<\/strong>: 6.62%<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">Riskiest Stock:<\/h3>\n\n\n\n<p>The <strong>riskiest stock<\/strong> for investors is <strong>Humana<\/strong>, which has the highest beta of <strong>1.16<\/strong>. Beta measures the <strong>sensitivity of a stock&#8217;s returns to the returns of the market<\/strong>. A higher beta indicates greater volatility compared to the overall market. Since Humana\u2019s beta is greater than 1, it is expected to experience more volatility than the market. This means that <strong>investors in Humana are taking on more risk<\/strong>, as its stock price is more sensitive to fluctuations in the broader market. Conversely, <strong>Aetna<\/strong> with the lowest beta of <strong>0.63<\/strong> is the least risky among the four, as its stock is less volatile in relation to market movements.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" src=\"https:\/\/learnexams.com\/blog\/wp-content\/uploads\/2025\/07\/learnexams-banner6-1028.jpeg\" alt=\"\" class=\"wp-image-259983\"\/><\/figure>\n","protected":false},"excerpt":{"rendered":"<p>Yahoo! Finance reported the following market betas for the stocks of selected health insurers: Company Beta UnitedHealth Group 0.70 Humana 1.16 Aetna 0.63 Cigna 0.71 Assume that the risk-free rate, RF, and required rate of return on the market value, R(Rm), were 2.0 percent and 8.5 percent, respectively. What are the required return rates of [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[25],"tags":[],"class_list":["post-259979","post","type-post","status-publish","format-standard","hentry","category-exams-certification"],"_links":{"self":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/259979","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/comments?post=259979"}],"version-history":[{"count":0,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/259979\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/media?parent=259979"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/categories?post=259979"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/tags?post=259979"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}