Question

Given an expected market return of 12.0%, a beta of 0.75 for Benson Industries, and a risk-free rate of 4.0%, what is the expected return for Benson Industries?

Answer 1

Answer:

Re = 10%

Explanation:

using the CAPM formula, the cost of equity is:

Re = risk free + (beta x market premium)

• risk free = 4%
• market premium = market return - risk free = 12% - 4% = 8%
• beta = 0.75

Re = 4% + ((0.75 x 8%) = 10%

Since the beta is lower than 1, this stock is less volatile than the market, that is why the required rate of return is lower than the market return.