Question

Mulherin's stock has a beta of 1.2, its required return is 10%, and the risk-free rate is 4%. What is the required rate of return on the market? (Answer: %, Hint: First, find the market risk premium.)

Answer 1

Answer:

9%

Explanation:

The formula is Ra=Rf+(Rm-Rf)Ba

Ra=10%

Ba=1.2

Rf=4%

Rm=?

Ra=Rf+(Rm-Rf)*Ba

10%=4%+(Rm-4%)*1.2

10%=4%+1.2Rm-4.8%

10%+4.8%=4%+1.2Rm

14.8%-4%=1.2Rm

Rm= 10.8%/1.2

Rm=9%