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Suppose that the risk-free rate is 5% and the market portfolio has an expected return of 13% with a volatility of 18%.Monsters Inc.has a 24% volatility and a correlation with the market of .60,while California Gold Mining has a 32% volatility and a correlation with the market of -.7.Assume the CAPM assumptions hold.
-California Gold Mining's required return is closest to:
A)-5%.
B)13%.
C)15%.
D)5%.

Question

Quizplus · Accepted Answer

Using the CAPM formula: Required Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). First, calculate Beta for California Gold Mining: Beta = Correlation * (Volatility of Stock / Volatility of Market) = -0.7 * (0.32 / 0.18) = -1.244. Then, Required Return = 5% + (-1.244) * (13% - 5%) = -5%.

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