Financial Risk Manager Part 1
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The expected return of the Karachi Stock exchange is 17%, and the rate on Pakistan's risk-free bonds is 7.5%. Suppose the beta of Bata Corporation shares is 0.75, what is the required rate of return on Bata Corporation's shares?
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TTanishq
A
0.1263
B
0.2025
C
0.1673
D
0.1463
Explanation:
The required rate of return on shares is calculated using the Capital Asset Pricing Model (CAPM).
CAPM Formula: Required rate of return = Risk-free rate + Beta × (Market Return - Risk-free rate)
Given:
- Risk-free rate = 7.5% = 0.075
- Market Return = 17% = 0.17
- Beta = 0.75
Calculation: Required rate of return = 0.075 + 0.75 × (0.17 - 0.075) = 0.075 + 0.75 × 0.095 = 0.075 + 0.07125 = 0.14625 ≈ 14.63%
Therefore, the required rate of return is 14.63%, which corresponds to option D (0.1463).
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