Answer:
e. 10.0%
Explanation:
Using the capital asset pricing model we have:
Required return = Rf + beta [tex]\times[/tex] (Rm - Rf)
Where Rf = Risk free return
Rm = Market return
Beta = Beta coefficient
Provided,
Partridge Plastic Stock's information as:
Beta = 1.4
Required return = 13%
Risk free rate = 6%
Putting values in equation, we will get market rate of return
13% = 6% + 1.4 [tex]\times[/tex] (Rm - 6%)
[tex]\frac{0.07}{1.4}[/tex] = Rm - 6%
5% = Rm - 6%
11% = Rm
Now putting this value in equation for information provided for Cleaver Motor's Stock
Required return = 6% + 0.8 [tex]\times[/tex] (11% - 6%)
= 6% + 4%
= 10%
