Question

Your company has no long-term debt; hence, its risk factor is only 0.7. The risk-free interest rate/return is currently 1%, and the broader market return is 9.2%. What is your expected rate of return on investment?

Answer 1

The expected rate of return for the company's investment, considering a risk factor of 0.7, the risk-free rate of 1%, and the market return of 9.2%, is calculated using the CAPM formula to be 6.74%.

Step-by-step explanation:

The expected rate of return on an investment can be estimated using the Capital Asset Pricing Model (CAPM), which takes into account the risk-free interest rate, the expected market return, and the risk of the investment itself, usually expressed as beta (β). In this scenario, since the company has no long-term debt, its beta is given as 0.7. This represents its risk relative to the overall market risk. To calculate the expected rate of return, the formula is:Risk-free rate + Beta * (Market return - Risk-free rate) =
1% + 0.7 * (9.2% - 1%)

Given these values, the expected rate of return is:

1% + 0.7 * 8.2% =
1% + 5.74% =
6.74%

Thus, the expected rate of return for the company's investment, considering its risk factor, would be 6.74%.