Answer:
4.5%
Explanation:
The formula to compute the expected rate of return under the CAPM model is shown below:
Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)
For stock r, the required rate of return is
= 7% + 1.5× (13% - 7%)
= 7% + 1.5 × 6%
= 16%
For stock s, the required rate of return is
= 7% + 0.75× (13% - 7%)
= 7% + 0.75 × 6%
= 11.5%
So, the difference of required rate of return is
= 16% - 11.5%
= 4.5%
The Stock R has high riskier stock whereas the stock S has less riskier stock due to beta
