The expected rate of return on Rooter Industries is 1.5 times the 16 percent expected rate of return from the market. What is Research's beta if the risk-free rate is 8 percent?
A) 2
B) 3
C) 4
D) 5
E) 6

Question

Quizplus · Accepted Answer

The expected rate of return on Rooter Industries can be calculated as 1.5 times the market return of 16%, which gives 24%. Using the Capital Asset Pricing Model (CAPM), which is $E(R_i) = R_f + \beta_i(E(R_m) - R_f)$, where $E(R_i)$ is the expected return on the asset, $R_f$ is the risk-free rate, $\beta_i$ is the beta of the asset, and $E(R_m)$ is the expected return of the market. Plugging in the values: $24\% = 8\% + \beta(16\% - 8\%)$. Solving for $\beta$ gives $\beta = 2$.

The Expected Rate of Return on Rooter Industries Is 1