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Asked Nov 24, 2019
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As in Question 1, Claim Denied Insurance Company has a beta of 1.2.  Assume that the risk-free rate of return is 5 percent and the market risk premium is 6 percent.  What is the appropriate required return on Claim Denied Insurance Company stock?

 
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Expert Answer

Step 1

The formula to calculate required return using CAPM model is given below:

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Beta Expected return Risk free return | x(Market risk premium)

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Step 2

Substitute 5% for risk free return, 1.2 for beta and 6...

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Expected return 5%+1.2x(6%) =5%+7.2% = 12.2%

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