Question

ABC com mon has a beta of 09. If the expected return on the market is 12.5% and the risk-free rate is 2.5%, what is the appropriate required rate of return on ABC? 0 9.5% o 11.5% ○ 12% o 1396. QUESTION9 A portfolio consisting of risky stocks must be a high risk portfolio. TRUE O FALSE

Answer 1

Required rate of return on ABC

As per Capital Asset Pricing Model [CAPM], the Required Rate of Return on Stock is computed by using the following equation

Required Rate of Return = Risk-free Rate + Beta[Market Rate of Return – Risk-free Rate]

= Rf + Bet(Rm – Rf)

Here we’ve, Risk-free Rate (Rf) = 2.50%

Market Rate of Return (Rm) = 12.50%

Beta of the stock = 0.90

Therefore, the Required Rate of Return = Risk-free Rate + Beta[Market Rate of Return – Risk-free Rate]

= Rf + Bet(Rm – Rf)

= 2.50% + 0.90[12.50% - 2.50%]

= 2.50% x [0.90 x 10%]

= 2.50% + 9%

= 11.50%

“Hence, the Required rate of return on ABC would be 11.5%”

Question-9

“TRUE”. A portfolio consisting of risky stocks will be a high risk portfolio