Question

Inflation, recession, and high interest rates are economic events that are best characterized as being a systematic risk factors that can be diversified away. b. company-specific risk factors that can be diversified away. c. among the factors that are responsible for market risk. d. risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers. c. irrelevant except to governmental authorities like the Federal Reserve. Calculate the required rate of return for Climax Inc., assuming that (1) investors expect a 4.0% rate of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 5.0%, (4) the firm has a beta of 1.00, and (5) its realized rate of return has averaged 15.0% over the last 5 years. a. 10.29% b. 10.83% c. 11.40% d. 12.00% e. 12.60% Cooley Company's stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is the firm's required rate of return? a. 11.36% b. 11.65% c. 11.95% d. 12.25% e. 12.55%

Answer 1

7.
Required rate of return = (Real risk free rate + Inflation rate) + (Risk premium * beta)
= (3% + 4%) + (5% * 1)
= 7% + 5%
= 12%
Required rate of return = 12%

8.

Required rate of return = Risk free rate + (beta * market risk premium)
= 4.25% + (1.40 * 5.50%)
= 4.25% + 7.7%
= 11.95%

Answer 2

among the factors that are responsible for market risk.