You're working at Exxon. The risk-free rate in the economy right now is 0.14%.   You believe the market will average 6.09% per year over the next 20 years.  Exxon's stock has a beta of 1.7.  What is the required return for Exxon? 

To determine the required return for Exxon's stock, we can use the **Capital Asset Pricing Model (CAPM)** formula. CAPM is given by:

\[
\text{Required Return} = r_f + \beta \times (r_m - r_f)
\]

Where:
- \(r_f\) is the risk-free rate (0.14% or 0.0014 in decimal form),
- \(\beta\) is the beta of Exxon's stock (1.7),
- \(r_m\) is the expected market return (6.09% or 0.0609 in decimal form),
- \(r_m - r_f\) is called the market risk premium.

### Step-by-Step Calculation:
1. **Risk-free rate (\(r_f\))**: 0.14% = 0.0014
2. **Market return (\(r_m\))**: 6.09% = 0.0609
3. **Beta (\(\beta\))**: 1.7

Now, calculate the market risk premium:
\[
r_m - r_f = 0.0609 - 0.0014 = 0.0595
\]

Then, apply the CAPM formula:
\[
\text{Required Return} = 0.0014 + 1.7 \times 0.0595
\]
\[
\text{Required Return} = 0.0014 + 0.10115 = 0.10255
\]

So, the required return for Exxon is approximately **10.26%**.

Would you like further details or explanations?

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Here are 5 related questions to expand your understanding:
1. How does a company's beta influence its required return?
2. What factors affect the risk-free rate in an economy?
3. How is the market return estimate derived in the CAPM model?
4. What other models can be used to estimate required returns besides CAPM?
5. How does Exxon's beta of 1.7 compare to other companies in the oil industry?

**Tip**: A higher beta indicates that a stock is more volatile compared to the overall market, leading to a higher required return.

You're working at Exxon. The risk-free rate in the economy right now is 0.14%. You believe the market will average 6.09% per year over the next 20 years. Exxon's stock has a beta of 1.7. What is the required return for Exxon?

Learn how to calculate Exxon's required return using the Capital Asset Pricing Model (CAPM). With a risk-free rate of 0.14%, market return of 6.09%, and Exxon's beta of 1.7, this finance problem walks through the CAPM formula step-by-step. Perfect for college-level finance students.

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