Assume that the risk-free rate is 6% and the market risk premium is 5%. Given this information, which of the following statements is CORRECT?
A) An index fund with beta = 1.0 should have a required return of 11%.
B) If a stock has a negative beta, its required return must also be negative.
C) An index fund with beta = 1.0 should have a required return less than 11%.
D) If a stock's beta doubles, its required return must also double.

Question

Quizplus · Accepted Answer

The required return can be calculated using the Capital Asset Pricing Model (CAPM), which is: Required Return = Risk-Free Rate + (Beta * Market Risk Premium). For an index fund with a beta of 1.0, the required return would be 6% + (1.0 * 5%) = 11%. Choices B, C, and D misunderstand the relationship between beta, required return, and how the CAPM formula works.

Assume That the Risk-Free Rate Is 6% and the Market