The risk-free rate of return is 4.2 percent, the expected market return is 9 percent, and the beta for Lea, Inc.is 1.12.What is Lea's required rate of return?
A) 9.58%
B) 10.08%
C) 13.70%
D) 14.28%

Question

Quizplus · Accepted Answer

The correct answer is A because the required rate of return for Lea, Inc. is 9.58%. This is calculated using the Capital Asset Pricing Model (CAPM), which states that the required rate of return for a stock is equal to the risk-free rate of return plus the beta of the stock multiplied by the difference between the expected market return and the risk-free rate of return. In this case, the risk-free rate of return is 4.2 percent, the expected market return is 9 percent, and the beta for Lea, Inc. is 1.12. Plugging these values into the CAPM formula, we get:Required rate of return = 4.2% + 1.12 * (9% - 4.2%) = 9.58%

The Risk-Free Rate of Return Is 4