A manager believes his firm will earn a 1700 percent return

A manager believes his firm will earn a 17.00 percent return next year. His firm has a beta of 1.29, the expected return on the market is 15.00 percent, and the risk-free rate is 8.00 percent.

Compute the return the firm should earn given its level of risk. (Round your answer to 2 decimal places.)

Solution

We use the CAPM model in this question-

Requied return = Rf + ß (Rm-Rf)

= 8 + 1.29 (15-8)

= 8 + 9.03

= 17.03%

So the required rate of return is 17.03%

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