Question

The expected rate of return on Rewind Industries is 2.5 times the 12 percent expected rate of return from the market. What is Rewind's beta if the risk-free rate is 6 percent

Answer 1

Answer:

beta = 6

Explanation:

the CAPM formula is:

Required return = risk free + (beta x market premium)

market return = 12% = 6% x (1 x 6%)

risk premium = 12% - 6% = 6%

required return = 12% x 2.5 = 30%

risk free = 6%

beta x market premium = 30% + 6% = 36%

beta = 36% / 6% = 6, which means that this stock is very risky and very volatile