Monroe Mclntyre has estimated the expected return for Bruehl Industries to be 9.45%. He notes the risk-free rate is 1.30% and the return of the market is 10.60%. Based on this information, he estimates Bruehl's beta to be: O A. 0.88. O B. 0.77. O C. 1.02.
![**Expected Return and Beta Estimation**
Monroe McIntyre has estimated the expected return for Bruehl Industries to be 9.45%. He notes that the risk-free rate is 1.30% and the return of the market is 10.60%. Based on this information, he estimates Bruehl's beta to be:
- A. 0.88
- B. 0.77
- C. 1.02
**Explanation:**
In this scenario, Monroe McIntyre is using the Capital Asset Pricing Model (CAPM) to estimate the beta of Bruehl Industries. The CAPM formula is:
\[
\text{Expected Return} = \text{Risk-Free Rate} + \beta \times (\text{Market Return} - \text{Risk-Free Rate})
\]
By rearranging the formula, we can solve for beta (\(\beta\)):
\[
\beta = \frac{\text{Expected Return} - \text{Risk-Free Rate}}{\text{Market Return} - \text{Risk-Free Rate}}
\]
Plugging in the numbers:
- Expected Return = 9.45%
- Risk-Free Rate = 1.30%
- Market Return = 10.60%
\[
\beta = \frac{9.45\% - 1.30\%}{10.60\% - 1.30\%}
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The Capital Asset Pricing Model (CAPM) refers to the model which tells us how the financial markets price their securities and therefore helps in determining or calculating the expected returns on the capital investments. It is used in finance to measure the expected returns from the risky assets with the help of costs of capital and risk from those assets. The beta measures the riskiness of the assets. This model helps the investors in calculating the risk of the investment and the rate of return which they should expect from the investment. Risk-free rate under this model accounts for the time value of money and other components of this model being the systematic risk, return of the market takes into consideration the additional risk taken by the investor.
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