Question

A project has a beta of 0.83, the risk-free rate is 2.9%, and the market risk premium is 6.5%. The project's expected rate of return is ____%.

Answer 1

Using the Capital Asset Pricing Model (CAPM), the expected rate of return for the project is approximately 8.30%, calculated by adding the risk-free rate to the product of the beta and the market risk premium.

Step-by-step explanation:

To calculate the project's expected rate of return, we can use the Capital Asset Pricing Model (CAPM), which is a model that describes the relationship between systematic risk and expected return for assets, particularly stocks. Here’s the formula for CAPM:

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

The values provided in the question are:

Beta = 0.83

Risk-Free Rate = 2.9%

Market Risk Premium = 6.5%

Plugging these into the formula gives:

Expected Rate of Return = 2.9% + (0.83 × 6.5%)

Expected Rate of Return = 2.9% + 5.395%

Expected Rate of Return = 8.295%

Therefore, the project's expected rate of return is approximately 8.30%.

Answer 2

The project's expected rate of return is 8.3%

Step-by-step explanation:

The following question would be solved using the CAPM (Capital Asset Pricing Module) formulae, which is calculated as follows:

Ra = Rrf + [Ba x (Rm - Rrf)}

Where:

Ra = Project's Expected rate of return

Rrf = Risk-free rate

Ba = Beta

Rm = Expected return of the market

Note: We have been provided with risk premium which is calculated by deducting Risk-free rate from Expected return of the market (Rm - Rrf = Risk premium).

Ra = 2.9% + [0.83 x 6.5%]

Ra = 2.9% + 5.4% (rounded off from 5.395%)

Ra = 8.3%