Question

According to the camp the required return on a stock with beta of 1.5 is 15 percent and for a stock with beta of 0.9 is 10.5 percent.What is the required return on a stock with beta of 1.2?

Answer 1

If according to the camp, the beta & the return is linear then we have this:

Solution:
We can thus use the formula of linear interpolation
$x = x0 \: + \: (y - y0) \times \frac{x1 - x0}{y1 - y0}$
Then on substituting all values, we get
X = 15 + [(1.2 - 1.5)* (10.5-15)/(0.9-1.5)]

Therefore, X = 12.75%

The required rate of return on stock with beta of 1.2 is 12.75%.