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%.**

In case of any query, kindly comment on the solution.

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