Currently, the expected return on the market is 12.5% and the required rate of return for Alpha, Inc.is 12.5%.Therefore, Alpha's beta must be
A)less than 1.0.
B)greater than 1.0.
C)equal to 1.0.
D)between 0 and .5.

Question

Quizplus · Accepted Answer

The required rate of return for Alpha, Inc. is the same as the expected return on the market, which means that Alpha's beta must be equal to 1.0 according to the CAPM formula:

Required rate of return = risk-free rate + beta × (expected market return - risk-free rate)

12.5% = risk-free rate + 1.0 × (12.5% - risk-free rate)

Solving for beta, we get:

Beta = (12.5% - risk-free rate) / (12.5% - risk-free rate)
Beta = 1.0

Therefore, the correct answer is C, Alpha's beta must be equal to 1.0.

Currently, the Expected Return on the Market Is 12