Question

You looked up financial information for your favorite company on Yahoo Finance and found out that its stock's Beta is 1.4. The T-Bill rate is currently around 2.5%. The expected return on the market portfolio is 13.2%. This information allows you to calculate exactly how high the required annual return on this company's stock should be that would correctly compensate the investors for the amount of systematic risk that they would be facing when buying this stock. Your calculated required annual return for the company's stock equals _____ percent. (Put the answer in percent, rather than in decimals. Do NOT use "%" in your answer. Round your answer to TWO decimal places, for example, 10.23)

Answer 1

17.48

Step-by-step explanation:

In order to calculate this we need to apply the Capital Asset Pricing Model(CAPM) formula,

Required rate = Risk free rate + Beta(Market risk-Risk free rate)

Required rate = 0.025 + 1.4( 0.132 - 0.025)

Required rate = 0.1748.

Hence the calculated required annual return for the company's stock equals 17.48

Hope this Helps.

Goodluck.