According to MSN money, the stock of Orange Corporation has a beta of 1.5, but according to Yahoo Finance it is 1.75. The expected rate of return on the market is 12% and the risk free rate is 2%. What is the difference between the required rates of return calculated using each of these betas?
A) 1.50%
B) 1.75%
C) 2.0%
D) 2.5%

Question

Quizplus · Accepted Answer

The required rate of return is calculated using the Capital Asset Pricing Model (CAPM): Required Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Using a beta of 1.5, the required return is 2% + 1.5 * (12% - 2%) = 17%. Using a beta of 1.75, the required return is 2% + 1.75 * (12% - 2%) = 19.5%. The difference is 19.5% - 17% = 2.5%.

According to MSN Money, the Stock of Orange Corporation Has