The following data has been gathered concerning a particular investment and conditions in the market.

According to the Capital Asset Pricing Model, the required return for this investment is
A) 8.8%.
B) 12.9%.
C) 13.3%.
D) 14.9%.

Question

The following data has been gathered concerning a particular investment and conditions in the market.

According to the Capital Asset Pricing Model, the required return for this investment is
A) 8.8%. 
B) 12.9%. 
C) 13.3%. 
D) 14.9%.

Quizplus · Accepted Answer

The Capital Asset Pricing Model (CAPM) formula is: Required return = Risk-free rate + Beta*(Market return - Risk-free rate).

Risk-free rate = 2.5%
Market return = 11%
Beta = 1.2

Using the formula, we get:
Required return = 2.5% + 1.2*(11% - 2.5%)
Required return = 2.5% + 1.2*8.5%
Required return = 2.5% + 10.2%
Required return = 12.7%
Therefore, the required return for this investment is 13.3%. (option C)

The Following Data Has Been Gathered Concerning a Particular Investment