The risk-free rate of return is 2% while the market rate of return is 12%.Parson Company has a historical beta of .85.Today, the beta for Delta Company was adjusted to reflect internal changes in the structure of the company.The new beta is 1.38.What is the amount of the change in the expected rate of return for Delta Company based on this revision to beta?
A)8.5%
B)5.3%
C)12.2%
D)14.0%

Question

Quizplus · Accepted Answer

The change in expected return is calculated using the Capital Asset Pricing Model (CAPM): Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). The change in expected return is: (1.38 - 0.85) * (12% - 2%) = 5.3%.

The Risk-Free Rate of Return Is 2% While the Market