Question

Now assume a risk-free rate of interest of 4%, an expected rate of return on the global market portfolio of 8% and a global beta of 0.90 then the ICAPM results in a cost of equity of:

Answer 1

7.6%

Step-by-step explanation:

In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below

Expected rate of return = Risk-free rate of return + Global Beta × (Global Market rate of return - Risk-free rate of return)

= 4% + 0.90 × (8% - 4%)

= 4% + 0.90 × 4%

= 4% + 3.6%

= 7.6%

The (Global Market rate of return - Risk-free rate of return) is also called global market risk premium