What is the beta of a firm whose equity has an expected return of 21.3 percent when the risk-free rate of return is 7.0 percent and the expected return on the market is 18.0 percent?

Question

Quizplus · Accepted Answer

Using the Capital Asset Pricing Model (CAPM):
Expected return on equity = risk-free rate + beta*(expected return on market - risk-free rate)
21.3% = 7.0% + beta*(18.0% - 7.0%)
Solving for beta: 
beta = (21.3% - 7.0%) / (18.0% - 7.0%) = 1.30
Therefore, the beta of the firm is 1.30.

What Is the Beta of a Firm Whose Equity Has