a. Calculate the required rate of return for an asset that has a beta of 1.19, given a risk-free rate of 2.7% and a market return of 8.9%. b. If investors have become more risk-averse due to recent geopolitical events, and the market return rises to 12.1%, what is the required rate of return for the same asset?
a. Calculate the required rate of return for an asset that has a beta of 1.19, given a risk-free rate of 2.7% and a market return of 8.9%. b. If investors have become more risk-averse due to recent geopolitical events, and the market return rises to 12.1%, what is the required rate of return for the same asset?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
a. Calculate the required rate of return for an asset that has a beta of
1.19,
given a risk-free rate of
2.7%
and a market return of
8.9%.
b. If investors have become more risk-averse due to recent geopolitical events, and the market return rises to
12.1%,
what is the required rate of return for the same asset?Expert Solution
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