Carolina Insurance Company is considering the purchase of a fire insurance company. The fire insurance company has a beta of 2.5. If the risk-free rate is 8 percent and the market risk premium is 6 percent, the required rate of return that should be used to evaluate the insurance company is _____.
A)13%
B)23%
C)18%
D)11%
E)14%

Question

Carolina Insurance Company is considering the purchase of a fire insurance company. The fire insurance company has a beta of 2.5. If the risk-free rate is 8 percent and the market risk premium is 6 percent, the required rate of return that should be used to evaluate the insurance company is _____. 
A)13%
B)23%
C)18%
D)11%
E)14%

Quizplus · Accepted Answer

The required rate of return can be calculated as follows: 
Required rate of return = Risk-free rate + Beta x Market risk premium 
= 8% + 2.5 x 6% 
= 23% 
Therefore, the best choice is B) 23%.

Carolina Insurance Company Is Considering the Purchase of a Fire