Question

Polly Khan is trying to calculate the current market rate given the following information: Investor's have been requiring a 12% annual return on Builtrite's stock which has a beta of 2.0 and the current risk-free rate is 4%. What is the current market rate? 4% 6% 8% O 10%

Answer 1

Given that,

Required return on Builtrite stock R = 12%

Beta of the stock = 2

risk free rate Rf = 4%

Using CAPM, expected market return is calculated as

R = Rf + beta*(Rm - Rf)

=> 12 = 4 + 2*(Rm - 4)

=> Rm = 8%

So, market rate = 8%

Option C is correct