CMA Intermediate · Financial Management and Business Data Analytics · Risk and Return
Risk-free return is 7%, expected market return is 12% and the beta of Kaveri Textiles Ltd's shares is 1.4. Using CAPM, the required return on the shares is:
The required return is 14%. CAPM adds a risk premium to the risk-free rate; the premium equals beta times the market risk premium of 5%, which is 7%, giving 7% plus 7% equals 14 per cent.
- A14.0%Correct
- B12.0%
- C16.8%
- D19.0%
Explanation
CAPM: Ke = Rf + β(Rm − Rf) = 7 + 1.4 × 5 = 14%. Option 16.8% results from multiplying beta by market return (1.4 × 12). Option 19% adds beta × Rm to Rf wrongly (7+12).
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