Ba350 week 7 ( ba/350 week 7 ) ( ba 350 week 7 )
The required rate of return on a stock can be determined by using the capital asset pricing model (CAPM). This model takes into account the risk-free rate, the expected return on the market and an individual stock’s beta. The formula for CAPM is: Required Rate of Return = Risk Free Rate + Beta X (Market Expected Return – Risk Free Rate)
In this scenario, assuming that the risk-free rate is 6% and that the expected return on the market is 13%, we can calculate that a stock with a beta of 0.7 will have a required rate of return of 9.1%. This means that in order for an investor to turn a profit from holding this security, it must yield returns higher than 9.1%.
Ultimately, understanding how to calculate a stock’s required rate of return based on these factors is essential when making investment decisions as it helps investors determine which securities are likely to yield profits over time.