Capital asset pricing model MFI Inc has a beta of 125 If the

Capital asset pricing model) MFI Inc. has a beta of 1.25. If the expected market return is 11.0 percent and the risk-free rate is 7.0 percent, what is the appropriate required return of MFI (using the CAPM)? using the CAPM, the appropriate required return of MFI is 90 Round to two decimal places.

Solution

According to the CAPM equation,

Required Return on Stock = Risk free rate + Beta * (Expected Market Return - Risk free rate)

Therefore,

Required return on MFI Inc = 7% + 1.25 * (11% - 7%) = 7% + (1.25 * 4%) = 12%