The risk-free rate of return is 2% while the market rate of return is 12%.Parson Company has a historical beta of .85.Today, the beta for Delta Company was adjusted to reflect internal changes in the structure of the company.The new beta is 1.38.What is the amount of the change in the expected rate of return for Delta Company based on this revision to beta?
A) 8.5%
B) 10.5
C) 12.2%
D) 14.0%

Question

Quizplus · Accepted Answer

The expected rate of return is calculated using the Capital Asset Pricing Model (CAPM): Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). For Delta Company, the change in expected return is calculated as follows: Old Expected Return = 2% + 0.85 * (12% - 2%) = 10.5%New Expected Return = 2% + 1.38 * (12% - 2%) = 15.8%Change in Expected Return = 15.8% - 10.5% = 5.3% The question asks for the change in expected return, not the new expected return, so the correct answer is 5.3%, which is not listed. However, if the question intended to ask for the new expected return, the closest option would be 10.5% as the old expected return.

The Risk-Free Rate of Return Is 2% While the Market