Question

A project has a beta of 0.83, the risk-free rate is 2.9%, and the market risk premium is 6.5%. The project's expected rate of return is ____%.

Answer 1

Answer:

The project's expected rate of return is 8.3%

Explanation:

The following question would be solved using the CAPM (Capital Asset Pricing Module) formulae, which is calculated as follows:

Ra = Rrf + [Ba x (Rm - Rrf)}

Where:

Ra = Project's Expected rate of return

Rrf = Risk-free rate

Ba = Beta

Rm = Expected return of the market

Note: We have been provided with risk premium which is calculated by deducting Risk-free rate from Expected return of the market (Rm - Rrf = Risk premium).

Ra = 2.9% + [0.83 x 6.5%]

Ra = 2.9% + 5.4% (rounded off from 5.395%)

Ra = 8.3%