Assuming a risk-free rate of 8 percent and a market return of 12 percent, would a wise investor acquire a security with a beta of 1.5 and a rate of return of 14 percent given the facts above?
What will be an ideal response?
r = RF + b(rm - RF)
= 0.08 + 1.5(0.12 - 0.08 ) = 0.14 = 14%
Yes, a security with a beta of 1.5 should yield 14 percent rate of return.
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