The return on the market is 10.5% and the risk-free rate is 2.90%. The investor is conservative and his beta (β) is 0.75. a) What is the required rate of return for this investment using the CAPM approach? b) What if the (β) is 1.75, but the risk-free rate is 5% and the market return is 10.5%? What is the required rate of return for this investment? Please do it in excel and show the formulas.
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.
The return on the market is 10.5% and the risk-free rate is 2.90%. The investor is conservative
and his beta (β) is 0.75.
a) What is the required rate of
b) What if the (β) is 1.75, but the risk-free rate is 5% and the market return is 10.5%? What is the
required rate of return for this investment?
Please do it in excel and show the formulas.
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
