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Beta and Required Return

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Beta and Required Return
The riskless return is currently 6%, and Chicago Gear has estimated the contingent returns given here.

Realized Return
State of the Market Probability that State Occurs Stock Market Chicago Gear
Stagnant 0.20 -10% -15%
Slow Growth 0.35 10% 15%
Average Growth 0.30 15% 25%
Rapid Growth 0.15 25% 35%

Calculate the expected returns on the stock market and on Chicago Gear stock.
Stock Market
Chicago Gear
What is Chicago Gear's beta?
What is Chicago Gear's required return according to the CAPM?

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Solution Summary

The solution explains how to calculate the beta and the required return based on data about a company on the stock market. Step by step calculations are given.

Solution Preview

Calculate the expected returns on the stock market and on Chicago Gear stock.
Stock Market

rM = Prob1*rM1 + Prob2*rM2 + Prob3*rM3 + Prob4*rM4
= 0.2(-10%) + 0.35(10%) + 0.3(15%) + 0.15(25%) = 9.75%.

Chicago Gear

rCG = Prob1*rCG1 + Prob2*rCG2 + Prob3*rCG3 + ...

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