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    Working with risk and return for purchase of risky asset: beta coefficient of .85

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    If the required risk-free rate of return is estimated to be 4% and the expected rate of return on the market is 9%, what is the required rate of return on any risky asset held in a diversified portfolio when the asset's beta coefficient is 0.85?

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    Solution Preview

    To answer this question you could use the capital asset pricing model (CAPM). The CAPM equation is as follows:

    ERi = Rf + (ERm - Rf)b

    This states that the required rate of return (or the expected rate of return) of a risky asset 'i', ...

    Solution Summary

    The solution explains and computes the steps necessary to arrive at required rate of return on any risky asset.