Question

The expected return of the market is 10% while the risk free rate is 2%. A company with a beta of 1.5 would have a required return closest to?

Answer 1

Using the Capital Asset Pricing Model (CAPM), the required return for a company with a beta of 1.5, given a market return of 10% and a risk-free rate of 2%, is calculated to be 14%.

Step-by-step explanation:

The expected return on a company with a beta of 1.5 when the market expected return is 10% and the risk-free rate is 2% can be calculated using the Capital Asset Pricing Model (CAPM). The formula for CAPM is:

Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate).

Plugging in the numbers provided:

Expected Return = 2% + 1.5 * (10% - 2%) = 2% + 1.5 * 8% = 2% + 12% = 14%.

The required return closest to a company with a beta of 1.5 would therefore be 14%.