Question

A firm has a required return of 14.2% and a beta of 1.63. If the risk-free rate is currently 5.4%, what is the expected return to the market? Assume that CAPM is correct.

Answer 1

Answer:

10.8%

Explanation:

Required rate of return = Risk free rate + Beta x ( Expected rate - Risk free rate )

14.2% = 5.4% + 1.63 x ( market rate - 5.4% )

14.2% - 5.4% = 1.63 x ( market rate - 5.4% )

8.8% / 1.63 = market rate - 5.4%

5.4% = market rate - 5.4%

Market rate = 5.4% + 5.4%

Market rate = 10.8%

Market rate = 10.8%