CS Executive · Corporate Accounting and Financial Management · Security Analysis
According to the Capital Asset Pricing Model, the risk-free rate is 7%, the expected market return is 13% and a share of Sahyadri Pharma Ltd. has a beta of 1.5. What is the required return on the share?
The required return is 16%. Under CAPM it equals the risk-free rate of 7% plus beta of 1.5 times the market risk premium of 6%, which is 9%. Adding 7 and 9 gives 16%.
- A16%Correct
- B19.5%
- C13%
- D9%
Explanation
Required return = Rf + beta × (Rm − Rf) = 7 + 1.5 × 6 = 7 + 9 = 16%. Option 19.5% wrongly multiplies beta by the market return (1.5×13) and ignores the risk-free rate. Option 9% is only the risk premium.
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