Purchase Solution

Beta and Required Return

Not what you're looking for?

Ask Custom Question

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?

Purchase this Solution
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 + ...

Purchase this Solution
Free BrainMass Quizzes
Team Development Strategies

This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.

Social Media: Pinterest

This quiz introduces basic concepts of Pinterest social media

Cost Concepts: Analyzing Costs in Managerial Accounting

This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.

MS Word 2010-Tricky Features

These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.

Accounting: Statement of Cash flows

This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.

View More Free Quizzes
Related BrainMass Solutions

  • Stock Beta and Required Return on Stock

    Stock A has a beta = 1.0 and Stock B has a beta = 1.4. Stock A has a required return of 11%. What is Stock B's required return? 1) Stock a has a beta of 1.5 and Stock b has a beta of 0.5.

  • Risk Free Beta Calculations

    391375 Risk Free Beta Calculations 1. With a beta equal to .95 and a risk-free rate of 5%, if the required return on Carbo Certamics, Inc. is equal to 9%, what is the required return on the market, rm, assuming the maket is in equilibrium? 2.

  • Rate of Return and Unlevered Beta

    89451 Rate of Return and Unlevered Beta #1. An asset has a beta of 1.6. The risk-free rate is 6 percent, and the market risk premium is 8 percent. Using the SML, estimate the required rate of return on this asset. #2.

  • Calculate Stock Beta & Required Rate to Return

    solution computes the stock beta and the required rate of return.

  • Calculate Beta and rate of return for a stock

    426515 Calculate Beta and rate of return for a stock A stock has a required return of 11%, the risk-free rate is 7%, and the market risk premuim is 4%. A. What is the stock's beta? B.

  • Required rates of return given beta of stock

    429087 Calculate required rates of return given beta of stock Assume that the risk free rate is 3.5% and that the market risk premium rate is 7%.

  • Stock questions

    What is the required rate of return on a stock with a beta of 0.7? 8- 5 BETA AND REQUIRED RATE OF RETURN A stock has a required return of 11%, the risk- free rate is 7%, and the market risk premium is 4%. a. What is the stock's beta? b.

  • Required Return

    Using the CAPM equation Required return = Rf + (Rm-Rf) beta From the details of last year, we first calculate the beta of stock 11.50% = 5.50% + 4.75% X beta beta = 1.26 In the current year, Rf = 5.5% and Market risk premium = 4.75% + 2%=6.75% Required

  • Expected Return and Beta Risk

    Stock A Expected Return = 11% Beta = 1.5 Stock B Expected Return = 11% Beta = 0.5 In order to find undervaluation, we calculate the required return using CAPM Required Return = Risk free rate + (Market Return - Risk free rate) X beta

  • Beta and MRP

    Please note the formula to determine the required rate of return. Required rate of return = risk free rate + beta(market risk premium) First, we need to compute the required rate of return for the industries like Division 1 and 2.

View More Related Solutions