Question

Puffy Shirt Inc's common stock has a beta of 1.2. If the risk free rate of return is expected to be 4% and the market risk premium is 11%, what is the required return on Puffy Shirt's common stock

Answer 1

The required rate of return is 17.2%

Step-by-step explanation:

To calculate the required rate of return, we will use the CAPM or Capital asset pricing model. The formula for the required rate of return (r) is:

r = rRF + Beta * (rpM)

Where,

• rRF is the risk free rate.
• Beta is the measure of the risk
• rpM is the market risk premium

Required rate of return for Puffy Shirt Inc's stock is:

r = 0.04 + 1.2 * 0.11

r = 0.172 or 17.2%