Question

Question 3

If the expected rate of return on Muscat Stock Market is 8% and the return on Oman Central Bank treasury bills is 2.5%.

Instructions:

a. Value the required rate of return on Gulf Chemicals Company stock with a beta of 1.3.

b. Sketch the capital asset pricing model based on the information provided.

Answer 1

Capital asset pricing is used to calculate Required rate of return

Required rate of return = Risk free rate of return + Beta( Market return - Risk free return)

Where,

Risk free rate of return= 0.025

Beta= 1.3

Market return= 0.08

Lets put all the values in the formula

Required rate of return = 0.025+1.3(0.08-0.025)

= 0.025 + 1.3( 0.055)

= 0.025 + 0.0715

= 0.0965

So the required rate of return is 9.65%

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Hope this answer your query.

Feel free to comment if you need further assistance. J