Question

Using the capital asset pricing model (CAPM), calculate the required rate of return for an investment if the T-bill rate is currently 3.0%, the S&P 500 Index is 7.0% and the beta risk profile for the investment is 0.4. (Rounded to the nearest tenth of a percent)

Answer 1

To calculate the required rate of return using the CAPM: (Risk-Free Rate) + (Beta × (Market Return - Risk-Free Rate)). For the given values, the required rate of return is 4.6%, rounded to the nearest tenth of a percent.

Step-by-step explanation:

To calculate the required rate of return using the Capital Asset Pricing Model (CAPM), we need to know the risk-free rate, the expected market return, and the beta of the investment. The formula for CAPM is:

Required Rate of Return = Risk-Free Rate + (Beta × (Market Return - Risk-Free Rate))

In this case:

• Risk-Free Rate (T-bill rate): 3.0%
• Market Return (S&P 500 Index): 7.0%
• Beta risk profile for the investment: 0.4

Applying these values to the CAPM formula gives us:

Required Rate of Return = 3.0% + (0.4 × (7.0% - 3.0%))

This calculates to:

Required Rate of Return = 3.0% + (0.4 × 4.0%)

Required Rate of Return = 3.0% + 1.6%

Required Rate of Return = 4.6%

Rounded to the nearest tenth of a percent, the required rate of return is 4.6%.