Question

Problem 6-22 (similar to) Question Help (Capital asset pricing model) The expected retum for the general market is 154 percent, and the risk premium in the market is 8.7 percent. Tasaco, LBM, and Exocos have betas of 0.809, 0.691, and 0.542, respectively. What are the corresponding required rates of return for the three securities? a. Using the CAPM, the corresponding required rate of return for Tasaco is 13.74 % (Round to two decimal places) b. Using the CAPM, the corresponding required rate of return for LBM is 1271 %. (Round to two decimal places.) c. Using the CAPM, the corresponding required rate of return for Exxos is % (Round to two decimal places.)

Answer 1

Risk-free rate = Expected return on the market - Risk premium = 15.4% - 8.7% = 6.7%

Required rate of return = Risk-free rate + Beta(Risk premium)

Required rate of return for Tasaco = 0.067 + 0.809(0.087) = 0.1374 or 13.74%

Required rate of return for LBM = 0.067 + 0.691(0.087) = 0.1271 or 12.71%

Required rate of return for Exxos = 0.067 + 0.542(0.087) = 0.1142 or 11.42%