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Required Return

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Adriatic Corporation's stock had a required return of 11.50% last year, when the risk-free rate was 5.50% and the market risk premium was 4.75%. Now suppose there is a shift in investor risk aversion, and the market risk premium increases by 2%. The risk-free rate and Adriatic's beta remain unchanged. What is Adriatic's new required return? (Hint: First calculate the beta then find the required return.)

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Solution Summary

The solution explains how to calculate the required return given a change in risk aversion.

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Using the CAPM equation
Required return = Rf + (Rm-Rf) beta
From the ...

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