If the risk-free rate is 2.60 percent and the risk premium is 4.3 percent, what
ID: 2785536 • Letter: I
Question
If the risk-free rate is 2.60 percent and the risk premium is 4.3 percent, what is the required return? (Round your answer to 1 decimal place.)
Hastings Entertainment has a beta of 0.58. If the market return is expected to be 12.40 percent and the risk-free rate is 5.40 percent, what is Hastings’ required return? (Round your answer to 2 decimal places.)
The average annual return on an Index from 1986 to 1995 was 14.70 percent. The average annual T-bill yield during the same period was 5.00 percent.Explanation / Answer
Market risk premium = Market return – risk free rate of return
= 14.70 – 5
= 9.7 %
Required return = risk free rate + risk premium
= 2.60+ 4.3
= 6.9%
Capital asset pricing is used to calculate required rate of return
Required rate of return = Risk free rate of return + Beta( Market return - Risk free return)
Where,
Risk free rate of return= 0.054
Beta= 0.58
Market return= 0.124
Let’s put all the values in the formula
Required rate of return = 0.054+0.58(0.124-0.054)
= 0.054 + 0.58(0.07)
= 0.054 + 0.0406
= 0.0946
So the required rate of return is 9.46%
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