Question

Suppose that Disney (DIS) has a beta of 1.25 and Chipotle (CMG) has a beta of 0.55 , the risk-free interest rate is 3%, and you estimate the market's expected return to be 8%. requested and indicate the number of the question: until the final result, and indicate the for Disney. Show the formula, do the math step by step 2. Calculate the required rate of reture unit of measurement. until the final result, and indicate the for Chipotle. Show the formula, do the math step by step 3. Which company has a higher recte the unit of measurement. reports a higher expected return thaired rate of return? Explain the reason why this company

Answer 1

Using the CAPM formula, Disney's required rate of return is calculated to be 9.25%, whereas Chipotle's is 5.75%, making Disney's the higher of the two.

Step-by-step explanation:

To calculate the required rate of return for a stock using the Capital Asset Pricing Model (CAPM), the formula is expressed as:

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

For Disney (DIS), with a beta of 1.25:

1. Risk-Free Rate: 3%
2. Beta (DIS): 1.25
3. Market Return: 8%
4. Substituting these values into the CAPM formula gives:
5. Required Rate of Return (Disney) = 3% + 1.25 × (8% - 3%) = 3% + 1.25 × 5% = 3% + 6.25% = 9.25%

For Chipotle (CMG), with a beta of 0.55:

1. Risk-Free Rate: 3%
2. Beta (CMG): 0.55
3. Market Return: 8%
4. Substituting these values into the CAPM formula gives:
5. Required Rate of Return (Chipotle) = 3% + 0.55 × (8% - 3%) = 3% + 0.55 × 5% = 3% + 2.75% = 5.75%

Disney has a higher required rate of return than Chipotle. This is because a higher beta indicates that Disney's stock is more volatile and thus riskier compared to Chipotle, demanding a higher return to compensate for the additional risk.