An analyst has modeled the stock of Brown Kitchen Supplies usinga two-factor APT model. The risk-free rate is 5%, the requiredreturn on the first factor (r1) is 10%, and the required return on thesecond factor (r2) is 15%. If bi1 5 0.5 and bi2 5 1.3, what is Brown’srequired return? (20.5%)
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
An analyst has modeled the stock of Brown Kitchen Supplies using
a two-factor APT model. The risk-free rate is 5%, the required
return on the first factor (r1
) is 10%, and the required return on the
second factor (r2
) is 15%. If bi1 5 0.5 and bi2 5 1.3, what is Brown’s
required return? (20.5%)
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