Math Problem Statement
Solution
This problem involves calculating the required return on a company's stock using the Capital Asset Pricing Model (CAPM) formula:
Where:
- = Risk-free rate = 1.41% (0.0141)
- = Beta of the stock = 2.8
- = Expected market return = 7.05% (0.0705)
Step 1: Calculate the Market Risk Premium
Step 2: Apply the CAPM Formula
Step 3: Multiply and Add
Final Answer:
The required return for the company's stock is 17.20 (without the % symbol, as requested).
Would you like me to explain any specific step in more detail?
Related Questions:
- What does beta signify in the CAPM model, and why does a high beta imply higher risk?
- How does the risk-free rate affect the required return on a stock?
- What factors might cause the expected market return to change over time?
- How would the required return change if the beta were lower or higher?
- Why is CAPM widely used in finance, and what are its limitations?
Tip:
Always ensure the risk-free rate, beta, and market return are consistent in terms of time period (e.g., annualized) when using CAPM for calculations.
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Math Problem Analysis
Mathematical Concepts
Finance
Risk Analysis
Capital Asset Pricing Model (CAPM)
Formulas
Required Return = Risk-free rate + Beta * (Market Return - Risk-free rate)
Theorems
Capital Asset Pricing Model (CAPM)
Suitable Grade Level
Undergraduate Finance/Business
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