Question

Hocking Manufacturing Company has a beta of .75, while Levine Industries has a beta of 1.40. The required return on the stock market is 12.00%, and the risk-free rate is 4.25%. What is the difference between Hocking's and Levine's required rates of return

Answer 1

Required return as per CAPM:

Where,
ER = Required return
Rf = Risk-free rate
Rm = Market rate
=Beta

The required return for Hocking Manufacturing Company:

The required return for Levine Industries:

The difference between Hocking's and Levine's required rates of return:

Difference = 15.10% - 10.06%

= 5.04%