Question

Beale Manufacturing Company has a beta of 1.2, and Foley Industries has a beta of 0.50. The required return on an index fund that holds the entire stock market is 9%. The risk-free rate of interest is 4.5%. By how much does Beale's required return exceed Foley's required return? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Beale

Required return = risk free rate +(beta*(market rate-riskfree rate) )

Required return = 4.5% + (1.2*(9%-4.5%))

Required return = 9.90%

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Foley:

Required return = risk free rate +(beta*(market rate-riskfree rate) )

Required return = 4.5% + (0.5*(9%-4.5%))

Required return = 6.75%

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Excess return = 9.90% - 6.75%

Excess return = 3.15%

Beale required return exceeds 3.15% than Foleys required return.