Security a has an expected return of 7%, a standard deviation of
The required rate of return on a stock that has a beta of 0.7 is 10.1%. This can be calculated by using the Capital Asset Pricing Model (CAPM) which states that the expected return on an investment is equal to the risk-free rate plus the market risk premium multiplied by its beta coefficient. In this situation, the risk-free rate is 6%, the expected return on market is 13%, and beta of 0.7 implying a higher level of systematic risk than that of the overall market.
Therefore, using these values we can calculate:
Expected Return = Risk free Rate + (Market Risk Premium x Beta Coefficient)
Expected Return = 6% + (13%-6%) x 0.7
Expected Return = 10.1%
Therefore, based on these assumptions, an investment with a beta coefficient of 0.7 would require an expected return of 10.1%.