Required Rate of Return Calculation with CAPM Model

What is the required rate of return on a stock with a beta of 1.16?

Given the risk-free rate is 5.0% and the required return on the market is 11.2%.

(A) 8.98% (B) 9.59% (C) 11.68% (D) 12.19% (E) 13.98%

Final answer: The required rate of return on a stock with a beta of 1.16 is 13.09%.

To calculate the required rate of return on a stock with a beta of 1.16, we can use the Capital Asset Pricing Model (CAPM) formula.

The formula for CAPM is:

Required Rate of Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)

By plugging in the given values:

Required Rate of Return = 0.05 + 1.16 * (0.112 - 0.05) = 0.05 + 1.16 * 0.062 = 0.05 + 0.07192 = 0.13092 or 13.092%

Therefore, the required rate of return on the stock with a beta of 1.16 is 13.09%.