Under the capital asset pricing model, if the risk-free rate is 6%, beta is 1.2 and the expected market return is 11%, what is the required return?
Correct answer: C. 12%
- A. 10%
- B. 11%
- C. 12%
- D. 13.2%
Explanation
CAPM gives required return as risk-free rate plus beta multiplied by the market risk premium. Thus, 6% plus 1.2 multiplied by 5% equals 12%.
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Business finance explains how organisations plan, obtain and use money while balancing risk, return and liquidity. Topics include financial statements, time value of money, budgeting, working capital, capital structure, sources of finance, investment appraisal and cost of capital. Capital budgeting evaluates long-term projects, whereas working capital manages day-to-day operations.
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