Suppose that the risk-free interest rate is 4% per year, and the expected return on the...
Suppose that the risk-free interest rate is 4% per year, and the expected return on the market portfolio is 10% per year. The standard deviation of the return on the market portfolio is 24% per year. A consumer products company, ACC Corp, has a standard deviation of return of 45% per year, and a correlation with the market of 0.28
a) What is ACC’s beta?
b) If the CAPM holds, what is ACC’s required rate of return on equity?
Homework Answers
Answer a.
Beta of ACC = Correlation between ACC and Market * Standard
Deviation of ACC / Standard Deviation of Market
Beta of ACC = 0.28 * 0.45 / 0.24
Beta of ACC = 0.525
Answer b.
Required Return = Risk-free Rate + Beta * (Market Return -
Risk-free Rate)
Required Return = 4.00% + 0.525 * (10.00% - 4.00%)
Required Return = 4.00% + 3.15%
Required Return = 7.15%
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