Question

Kollo Enterprises has a beta of 0.70, the real risk-free rate is 2.00%, investors expect a 3.00% future inflation rate, and the market risk premium is 4.70%. What is Kollo's required rate of return?

Answer 1

Answer:

5.29%

Explanation:

Capital asset pricing model measure the expected return on an asset or investment. it is used to make decision for addition of specific investment in a well diversified portfolio.

Formula for CAPM

Required rate of return = Risk free rate + beta ( market risk premium )

As per given data:

Beta = 0.70

Risk free rate = 2.00%

Market risk premium = 4.70%

Required rate of return = 2% + 0.7 ( 4.7% )

Required rate of return = 2% + 3.29%

Required rate of return = 5.29%

Answer 2

Answer:

8.29

Explanation:

Nominal rate = inflation +real rate =2%+3% =5%

Required rate = Risk free rate+beta*risk premium =5%+.7*4.7% =8.29%