Question

Suppose the risk-free rate is 5 percent, the market rate of return is 10 percent, and beta is 2. Find the required rate of return using the CAPM.

a) 5%
b) 10%
c) 15%
d) 20%

Answer 1

The required rate of return using the CAPM can be calculated using the given values of risk-free rate, beta, and market rate of return.

Step-by-step explanation:

The required rate of return using the CAPM (Capital Asset Pricing Model) can be calculated using the formula:

R = Rf + β * (Rm - Rf)

Where:

• R is the required rate of return
• Rf is the risk-free rate
• β is the beta of the asset
• Rm is the market rate of return

Plugging in the given values:

• Rf = 5%
• β = 2
• Rm = 10%

R = 5% + 2 * (10% - 5%) = 15%

Therefore, the required rate of return using the CAPM is 15% (option c).