Problem 4

Finance Aug 07, 2020

Problem 4. XYZ company's share has a beta of 0.8. The risk-free rate is 4% and the expected return on the market is 10%. What is the required rate of return on XYZ's share?

Expert Solution

Using CAPM Model,
Re = Rf + (Rm-Rf)*B
Where,
Re = Require return
Rf = Risk free rate
Rm = Market return
B= Beta of the stock

Therefore,
Re = 4 + (10-4)*0.8
= 8.8%

Therefore,
required return of XYZ's share = 8.8%

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