The equation is Re=Rf+B(Rm-Rf) given the following Re=9%, Rm=11%, B=0.4 and Rf is X what is the step by step answer?
Answers
Answer:
The capital asset pricing model (CAPM) provides the required return based on the perceived level of systematic risk of an investmen
The calculation of the required return
The required return on a share will depend on the systematic risk of the share. What is the required return on the following shares if the return on the market is 11% and the risk free rate is 6%?
The shares in B plc have a beta value of 0.5
Answer: 6% + (11% - 6%) 0.5 = 8.5%
The shares in C plc have a beta value of 1.0
Answer: 6% + (11% - 6%) 1.0 = 11%
The shares in D plc have a beta value of 2.0
Answer: 6% + (11% - 6%) 2.0 = 16%.
Obviously, with hindsight there was no need to calculate the required return for C plc as it has a beta of one and therefore the same level of risk as the market and will require the same level of return as the market, ie the RM of 11 %. The systematic risk-return relationship is graphically demonstrated by the security market line. See Example 4.
Example 4
The CAPM contends that the systematic risk-return relationship is positive (the higher the risk the higher the return) and linear.
If we use our common sense, we probably agree that the risk-return relationship should be positive. However, it is hard to accept that in our complex and dynamic world that the relationship will neatly conform to a linear pattern. Indeed, there have been doubts raised about the accuracy of the