question archive Suppose that an investor estimates the beta of Intel stock as 1
Suppose that an investor estimates the beta of Intel stock as 1
Subject:FinancePrice:2.86 Bought3
Suppose that an investor estimates the beta of Intel stock as 1.4 and the market risk premium as 0.08 per year. The risk-free rate is 0.02 per year. a. Required rate of return 17.52 O b. Required rate of return 0.10 O c. Required rate of return 0.16 O d. Required rate of return 0.13
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| Using CAPM model, | ||
| Er = Rf+ (Rm-Rf)*B | ||
| where, | ||
| Er = Required return of the stock | ||
| Rm-Rf= Market risk premium | ||
| B= Beta of the stock | ||
| Therefore, | ||
| Er = 0.02 + (0.08)*1.4 | ||
| = 0.02 + 0.112 | ||
| = 0.132 or 0.13 | ||
| Therefore, option d is the correct answer. | ||
