Question

The expected rate of return on Rewind Industries is 2.5 times the 12 percent expected rate of return from the market. What is Rewind's beta if the risk-free rate is 6 percent

Answer 1

The expected rate of return on Rewind Industries is calculated as 2.5 times the expected rate of return from the market. The beta of Rewind Industries is 2.

Step-by-step explanation:

The expected rate of return on Rewind Industries is calculated as 2.5 times the expected rate of return from the market. Given that the expected rate of return from the market is 12 percent, the expected rate of return on Rewind Industries would be 30 percent (2.5 x 12).

Now, the beta of Rewind Industries can be calculated using the formula:

Beta = (Expected Rate of Return - Risk-Free Rate) / Market's Expected Rate of Return

Given that the risk-free rate is 6 percent, the market's expected rate of return is 12 percent, and the expected rate of return on Rewind Industries is 30 percent, we can substitute these values into the formula and calculate the beta:

Beta = (30% - 6%) / 12% = 2

Answer 2

beta = 6

Step-by-step explanation:

the CAPM formula is:

Required return = risk free + (beta x market premium)

market return = 12% = 6% x (1 x 6%)

risk premium = 12% - 6% = 6%

required return = 12% x 2.5 = 30%

risk free = 6%

beta x market premium = 30% + 6% = 36%

beta = 36% / 6% = 6, which means that this stock is very risky and very volatile