Question

If a company’s beta were to double, would its required return also double? Explain

Answer 1

As per the Security Market Line (SML) equation, an escalation in beta will escalate a company's predictable reoccurrence by an sum equivalent to the market risk premium times the change in beta. For instance, accept that the risk-free rate is 8%, and the market risk premium is 7%. If the company's beta doubles from 0.5 to 1.0 its expected return increases from 11.5% to 15%. So, in general, a company's expected return will not double when its beta doubles.