CS Executive · Corporate Accounting and Financial Management · Security Analysis
The risk-free rate is 6%, the expected market return is 14% and the beta of Kaveri Ltd's share is 1.5. Under CAPM, the required return on the share is:
The required return is 18%. CAPM gives risk-free rate plus beta times the market risk premium: 6% plus 1.5 times (14% minus 6%), which is 6% plus 12%. The premium of 8% is scaled by beta of 1.5.
- A18%Correct
- B20%
- C21%
- D12%
Explanation
Required return = Rf + beta x (Rm - Rf) = 6 + 1.5 x (14 - 6) = 6 + 12 = 18%. Option C wrongly uses 1.5 x 14 = 21 without the risk-free adjustment, and option B wrongly adds 1.5 x 14 to nothing else, ignoring the premium.
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