CMA Final · Strategic Financial Management · Asset Pricing Theories
The risk-free rate is 7% and the expected return on the market portfolio is 13%. Under the CAPM, what is the required return on a stock of Sundaram Textiles Ltd whose beta is 1.2?
The required return is 14.2%. CAPM adds the risk-free rate of 7% to beta times the market risk premium, which is 1.2 × 6% = 7.2%. The result 7% + 7.2% gives 14.2%.
- A14.2%Correct
- B7.2%
- C15.6%
- D22.6%
Explanation
Required return = Rf + beta × (Rm − Rf) = 7 + 1.2 × 6 = 14.2%. Giving 7.2% shows only the risk premium and leaves out the risk-free rate. Giving 15.6% multiplies beta by the whole market return.
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