Question

compute the required rate of return on a security with a beta of 1.9 assuming the risk free rate of 5% and the market return of 10% using the capital asset pricing model

Answer 1

Information provided:

Risk free rate= 5%

Beta= 1.9

Market return= 10%

The formula for calculating the required rate of return using the capital asset pricing model is given below:

Ke=Rf+b[E(Rm)-Rf]

Where:

Rf=risk-free rate of return which is the yield on default free debt like treasury notes

Rm=expected rate of return on the market.

B= Beta of the company

Ke= 5% + 1.9*(10% - 5%)

     = 5% + 9.50%

     = 14.50%

Therefore, the required rate of return is 14.50%.

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