CAPM AND REQUIRED RETURN HR Industries (HRI) has a beta of 1 8, while LR Industries’ (LRI) beta is 0 6. The risk-free rate is 6%, and the required rate of return on an average stock is 13%. The expected rate of inflation built into rRF falls by 1 5 percentage points, the real risk-free rate remains constant, the required return on the market falls to 10 5%, and all betas remain constant. After all of these changes, what will be the difference in the required returns for HRI and LRI?
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.
CAPM AND REQUIRED RETURN HR Industries (HRI) has a beta of 1 8, while LR Industries’ (LRI) beta is 0 6. The risk-free rate is 6%, and the required rate of return on an average stock is 13%. The expected rate of inflation built into rRF falls by 1 5 percentage points, the real risk-free rate remains constant, the required return on the market falls to 10 5%, and all betas remain constant. After all of these changes, what will be the difference in the required returns for HRI and LRI?
Step by step
Solved in 2 steps with 5 images
