Question

A company has a beta of 0.25. if the market return is expected to be 8 percent and the risk-free rate is 2 percent, what is the company's required return?

A) 13.50 percent
B) 1.50 percent
C) 4.00 percent
D) 3.50 percent

Answer 1

The company's required return is D) 3.5%.

Step-by-step explanation:

To calculate the company's required return, we can use the Capital Asset Pricing Model (CAPM) formula:

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

Given that the beta of the company is 0.25, the market return is expected to be 8%, and the risk-free rate is 2%, we can substitute these values into the formula:

Required Return = 2% + 0.25 * (8% - 2%) = 2% + 0.25 * 6% = 2% + 1.5% = 3.5%

Therefore, the company's required return is 3.5% which corresponds to option D).