The returns on the market, the returns on United Fund (UF), the risk-free rate, and the required return on the United Fund are shown below. Assuming the market is in equilibrium and that beta can be estimated with historical data, what is the required return on the market, rM?rRF: 7.00%; rUnited: 15.00%
A) 10.57%
B) 11.13%
C) 11.72%
D) 12.33%
E) 12.95%

Question

Quizplus · Accepted Answer

The required return on the market can be calculated using the Capital Asset Pricing Model (CAPM): rUnited = rRF + beta * (rM - rRF). Given rUnited = 15%, rRF = 7%, and assuming beta = 1 (since the market is in equilibrium), solve for rM: 15% = 7% + 1 * (rM - 7%), which gives rM = 15%.

The Returns on the Market, the Returns on United Fund