USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

-Refer to Exhibit 7.4. If the expected return on the market is 11.5% and the risk-free rate of return is 4.5%, then what are the required rates of return for stocks X, Y, and Z based on the CAPM? X Y Z
A) 4.8% 18.3% 16.9%
B) 7.2% 20.7% 22.3%
C) 10.7% 17.5% 14.4%
D) 10.1% 12.2% 19.2%
E) 11.1% 12.2% 21.3%

Question

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 7.4. If the expected return on the market is 11.5% and the risk-free rate of return is 4.5%, then what are the required rates of return for stocks X, Y, and Z based on the CAPM? X Y Z
A) 4.8% 18.3% 16.9% 
B) 7.2% 20.7% 22.3% 
C) 10.7% 17.5% 14.4% 
D) 10.1% 12.2% 19.2% 
E) 11.1% 12.2% 21.3%

Quizplus · Accepted Answer

Using the CAPM formula: 
Required rate of return = Risk-free rate + (beta x (expected return on the market - risk-free rate))
For stock X: 
Required rate of return = 4.5 + (0.8 x (11.5 - 4.5)) = 10.7%
For stock Y: 
Required rate of return = 4.5 + (1.2 x (11.5 - 4.5)) = 17.5%
For stock Z: 
Required rate of return = 4.5 + (1.6 x (11.5 - 4.5)) = 14.4%
Therefore, the best choice(s) is C.