Elephant Company common stock has a beta of 1.2. The risk-free rate is 6%, and the expected market rate of return is 12%. Determine the required rate of return on the security.
A) 7.2%
B) 14.4%
C) 19.2%
D) 13.2%

Question

Quizplus · Accepted Answer

Using the Capital Asset Pricing Model (CAPM):

Required Rate of Return = Risk-Free Rate + Beta x (Expected Market Rate of Return - Risk-Free Rate)
RROR = 6% + 1.2 x (12% - 6%)
RROR = 6% + 1.2 x 6%
RROR = 6% + 7.2%
RROR = 13.2%

Therefore, the required rate of return on the security is 13.2%. So, the best choice is D.

Elephant Company Common Stock Has a Beta of 1