Question

The risk-free rate is 6% and the expected rate of return on the market portfolio is 13%. a. Calculate the required rate of return on a security with a beta of 1.25.

Answer 1

Answer:

The required rate of return is r = 0.1475 or 14.75%

Explanation:

The required rate of return is the minimum return that investors demand/expect on a stock based on the systematic risk of the stock as given by the beta. The expected or required rate of return on a stock can be calculated using the CAPM equation.

The equation is,

r = rRF + Beta * (rM - rRF)

Where,

• rRF is the risk free rate
• rM is the return on market

r = 0.06 + 1.25 * (0.13 - 0.06)

r = 0.1475 or 14.75%