Question

The rate of return on the U.S. government treasury bill is 0.03 and the expected rate of return on the Wilshire 5000 is 0.10 . What is the required rate of return for a stock with a Beta 0.99

Answer 1

Answer:

The required rate of return is 9.93%

Explanation:

The CAPM can be used to calculate the required rate of return on a stock based on its systematic risk or beta. The formula for the required rate of return (r) using CAPM is:

r = rRF + β * (rM - rRF)

Where,

• rRF is the risk free rate
• β is the stock's beta
• rM is the expected return on the market

As t bills are risk free, the t bill rate is the risk free rate while Wilshire 5000's return is the rM.

Thus,

r = 0.03 + 0.99 * (0.1 - 0.03)

r = 0.0993 or 9.93%

Answer 2

Answer:

The required return of the stock is 9.93%

Explanation:

Given data

Government treasury bill / risk free rate = 0.03

ER on wilshire 5000 =0.10 this is a market index so represents the expected return on the market

Beta = 0.99

The Capital aAsset Pricing Model is appropriate to use from the given information

RR = rf + β *(rm- rf)

     = 0.03 +0.99 *(0.10-0.03)

      =0.0993/9.93%