Question

Assume that the risk-free rate is 8 percent the required rate of return on the market is 13 percent and the required rate of return on acme healthcare stock is 15 percent what is the implied beta coefficient

Answer 1

This is the formula for computing the required rate of return in a market: E(R) = Rf + ß( Rmarket - Rf ). This is called as the Capital Asset Pricing Model (CAPM). The E(R) represents the required rate of return; the Rf is the risk-free rate; the ß is the beta coefficient (which we are looking for); and the Rmarket is the rate of return on the market. Substituting the values to this formula, you can come up with the beta coefficient of 1.4.