Question

CAPM AND REQUIRED RETURN HR Industries (HRI) has a beta of 2.2, while LR Industries's (LRI) beta is 0.4. The risk-free rate is 6%, and the required rate of return on an average stock is 13%. The expected rate of inflation built into rRF falls by 1.5 percentage points; the real risk-free rate remains constant; the required return on the market falls to 10.5%; and all betas remain constant. After all of these changes, what will be the difference in the required returns for HRI and LRI? Round your answer to two decimal places. %

Answer 1

4.5%. Required return = Rpt ß (Rm. Rf). HR:- old Rf = 6% , New Rf = 6Y: -1.5% = Required return a 4.5%* 2.2( 20.5%+4.5%). i 4,5%. +2,2(6) _ 17.7). Required return = 4.5% 20.4 I 10.5% -4,5%) 4.54. Toiy (6) = 6.9% 17.2% 6.9% 10:30) Difference a