Consider a stock with a beta of 1.6. What is the stock's equilibrium required rate of return?

The correct answer is option E: 20.0%

The capital asset pricing model (CAPM) can be used to calculate the equilibrium required rate of return for a stock. The CAPM formula is:

r = Rf + beta x (Rm - Rf)

Where:

r = required rate of return

Rf = risk-free rate

beta = beta of the stock

Rm = expected market return

Rm - Rf = market risk premium

Plugging in the values given in the question, we get:

r = 0.04 + 1.6 x 0.10

r = 0.04 + 0.16

r = 0.20 or 20%

Therefore, the correct answer is option E: 20.0%.

What is the formula for calculating the equilibrium required rate of return for a stock using the capital asset pricing model (CAPM)? The formula for calculating the equilibrium required rate of return for a stock using the capital asset pricing model (CAPM) is r = Rf + beta x (Rm - Rf), where r is the required rate of return, Rf is the risk-free rate, beta is the beta of the stock, Rm is the expected market return, and Rm - Rf is the market risk premium.
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