The risk-free rate of return is 2.2 percent, the expected market return is 11 percent, and the beta for Solstice, Inc.is 1.12.What is Solstice's required rate of return?
A)8.80%
B)12.05%
C)13.20%
D)14.30%

Question

Quizplus · Accepted Answer

Solstice's required rate of return can be calculated using the Capital Asset Pricing Model (CAPM):

Required rate of return = Risk-free rate + beta*(Expected market return - Risk-free rate)

Required rate of return = 2.2% + 1.12*(11% - 2.2%)

Required rate of return = 2.2% + 1.12*(8.8%)

Required rate of return = 2.2% + 9.856%

Required rate of return = 12.056%

Therefore, the answer is B) 12.05%.

The Risk-Free Rate of Return Is 2