Plaid Pants, Inc. common stock has a beta of 0.90, while Acme Dynamite Company common stock has a beta of 1.80. The expected return on the market is 10 percent, and the risk-free rate is 6 percent. According to the capital-asset pricing model (CAPM) and making use of the information above, the required return on Plaid Pants' common stock should be , and the required return on Acme's common stock should be . A. 3.6 percent; 7.2 percent B. 9.6 percent; 13.2 percent C. 9.0 percent; 18.0 percent D. 14.0 percent; 23.0 percent E. Answer not given
Plaid Pants, Inc. common stock has a beta of 0.90, while Acme Dynamite Company common stock has a beta of 1.80. The expected return on the market is 10 percent, and the risk-free rate is 6 percent. According to the capital-asset pricing model (CAPM) and making use of the information above, the required return on Plaid Pants' common stock should be , and the required return on Acme's common stock should be . A. 3.6 percent; 7.2 percent B. 9.6 percent; 13.2 percent C. 9.0 percent; 18.0 percent D. 14.0 percent; 23.0 percent E. Answer not given
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 20P
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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.
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Plaid Pants, Inc. common stock has a beta of 0.90, while Acme Dynamite Company common stock has a beta of 1.80. The expected return on the market is 10 percent, and the risk-free rate is 6 percent. According to the capital-asset pricing model (CAPM ) and making use of the information above, the required return on Plaid Pants' common stock should be , and the required return on Acme's common stock should be .
A. 3.6 percent; 7.2 percent
B. 9.6 percent; 13.2 percent
C. 9.0 percent; 18.0 percent
D. 14.0 percent; 23.0 percent
E. Answer not given
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