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9‐1   The market has an expected return of 11 percent, and the risk‐free rate is 5...

9‐1   The market has an expected return of 11 percent, and the risk‐free rate is 5 percent. Pfizer has a beta of 0.9. What is the required rate of return for Pfizer?

9‐2   The market has an expected return of 12 percent, and the risk‐free rate is 5 percent. Activalue Corp’s systematic risk is 80 percent that of the market as a whole. What is the required rate of return for this company?

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Answer #1

9-1)

Required rate of return is found using the following equation

re = rf + beta ( rm - rf )

Required rate of return = 0.05 + 0.9 ( 0.11 - 0.05 )

Required rate of return = 10.4 %

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9-2)

Systematic risk represents the beta.

re = rf + beta ( rm - rf )

required rate of return = 0.05 + 0.80 ( 0.12 - 0.05)

required rate of return = 10.6 %

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