Investment Cash Flow during the Period Beginning Value Ending Value
A $15,000 $120,000 $118,000
B $80 $600 $500
C $7,000 $45,000 $48,000
Calculate the required return for an asset with the following beta:
Investment Beta Required Return
Asset A .8
Asset B 1.0
Asset C 1.5
Asset D 2.0
Return=(Ending Value+Cash flow)/Beginning Value-1
1.
=(118000+15000)/120000-1
=10.83%
2.
=(500+80)/600-1
=-3.33%
3.
=(48000+7000)/45000-1
=22.22%
Required return=risk free rate+beta*(market return-risk free rate)
1.
=9%+0.8*(13%-9%)
=12.20%
2.
=9%+1*(13%-9%)
=13.00%
3.
=9%+1.5*(13%-9%)
=15.00%
4.
=9%+2*(13%-9%)
=17.00%
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