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How to calculate - Rate of Return, CAPM

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1. Required rate of return: Stock R has a beta of 1.5, Stock S has a beta of 0.75, the expected rate of return on an average stock is 13 percent, and the risk-free rate of return is 7 percent. By how much does the required return on the riskier stock exceed the required return on the less risky stock?

2. CAPM and required return: Calculate the required rate of return for Manning Enterprises, assuming that investors expect a 3.5 percent rate of inflation in the future. The real risk-free rate is 2.5 percent and the market risk premium is 6.5 percent. Manning has a beta of 1.7, and its realized rate of return averaged 13.5 percent over the past 5 years.

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The solution answers a few questions on finance and in the process explains how to calculate rate of return as well as CAPM.

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1. Return on stock R = risk free rate + beta*(market return - risk free rate)
=7% + 1.5*(13%-7%)=16%

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