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If Tesla has a Beta of 1.4, and the risk-free rate is 1.0%, and the average...

  1. If Tesla has a Beta of 1.4, and the risk-free rate is 1.0%, and the average market risk premium is 7%, what is Tesla’s estimated required return per the CAPM?

Please show work not in excel

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Answer #1

CAPM - Capital Asset Pricing Model

This pricing model helps in identifying the risk - return relationship of a particular stock.

Formula to calculate CAPM = Rf + Beta (Rm - Rf)

Rf  = Risk free rate

Rm = Return on investment.

Data given in this question.  

1. Beta = 1.4

2. Risk free rate = 1%

3. Average market risk premium = 7%

Market risk premium is the difference between return on investments and risk free rate. [i.e., Rm - Rf]

Therefore CAPM = 1% + 1.4 (7%)

= 1% + 9.8%

= 10.8%

Answer : Tesla's required return as per CAPM = 10.8%

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