Chapter 7-1. (Beta and required return) Piper’s Knits has calculated the contingent returns shown below. The riskless return is currently 5.75%. REALIZED RETURN (Figures in parentheses are negative returns.) State of the Market Probability that State Occurs Stock Market Piper’s Knits Stagnant 0.25 (10%) (15%) Slow growth 0.30 10 15 Average growth 0.30 15 25 Rapid growth 0.15 25 35

a. What is the expected return on the stock market taken as a whole and on Piper’s Knits as an individual stock?

b. Calculate Piper’s Knits’ beta.

c. Using the CAPM formula, calculate Piper’s Knits required return.

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