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    Expected Rate of Return

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    Shady Dealings Co. has a beta of 0.7 and a required rate of return of 15%. The market risk premium is currently 5%. If we expect the inflation premium to increase by 2% and Shady Dealings to acquire assets which will increase its beta to 1.05, what will be Shady Dealings' new required rate of return?

    a) 13.5%
    b) 22.8%
    c) 18.75%
    d) 15.25%
    e) 17.0%

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    Solution Preview

    First, find the risk free rate
    Let Er = return on assets
    Rf = risk free rate
    Rm = market return
    B = beta

    Er = Rf + B (Rm - Rf) * we are ...

    Solution Summary

    The solution shows in a very easy to understand way the steps required to calculate expected return and beta of a portfolio of stocks. The steps are standard. However, the OTA does a great job of explaining the concepts and steps. The solution can be very easily understood by anyone who has some basic knowledge.