Question

Here are data on two companies. The T-bill rate is 4% and the market risk premium is 6%.What would be the fair return for $1 Discount Store according to the capital asset pricing model (CAPM)

Answer 1

Answer:

13%

Explanation:

Please find attached a table containing further information needed to answer this question

According to the capital asset price model: Expected rate of return = risk free + beta x (market rate of return - risk free rate of return)

Expected rate of return = risk free + beta x market premium

Beta measures systemic risk

The higher beta is, the higher the systemic risk and the higher the compensation demanded for by investors

4% + (1.5 x 6%) = 13%