Yahoo Answers is shutting down on May 4th, 2021 (Eastern Time) and the Yahoo Answers website is now in read-only mode. There will be no changes to other Yahoo properties or services, or your Yahoo account. You can find more information about the Yahoo Answers shutdown and how to download your data on this help page.
Trending News
Need help finding the required rate of return?
MFI Inc has a beta of .86. If the expected market return is 11.5% and the risk free rate is 3%, what is the appropriate required return of MFI using CAPM? How do you find the risk free rate which is 7.5? I tried dividing, multiplying .86 and 11.5 but nothing.
1 Answer
- MohammadLv 77 years agoFavorite Answer
As per CAPM:
Required Rate of Return = Risk Free Rate of Return + Beta(Expected Market Rate of Return - Risk Free Rate of Return )
http://www.investopedia.com/terms/c/capm.asp
By substituting values, we get:
Required Rate of Return = 3 + 0.86(11.5 - 3 ) = 10.31 i.e, 10.31%
Q: How do you find the risk free rate which is 7.5^^? I tried dividing, multiplying .86 and 11.5 but nothing.
^^This portion is not clear.
We can find the Risk Free Return by using the the above mentioned formula:
Required Rate of Return = Risk Free Rate of Return + beta(Expected Market Rate of Return - Risk Free Rate of Return )
By applying values, we get:
10.31 = Risk Free Rate of Return + 0.86(11.5 - Risk Free Rate of Return ) OR
10.31 = Risk Free Rate of Return +9.89 -0.86 Risk Free Rate of Return OR
0.42 = 0.14 Risk Free Rate of Return ..(10.31 - 9.89 = 0.42) OR
0.42 = 0.14 Risk Free Rate of Return = 3 ie, 3% .
