The required rate of return on shares is calculated using the Capital Asset Pricing Model (CAPM).
Required rate of return = Risk-free rate + Beta (Market Return - Risk-free rate) = 7.5% + 0.75*(17% - 7.5%) = 14.63%

Things to Remember

• Capital Asset Pricing Model (CAPM) is used to calculate the required rate of return on an asset.
• The risk-free rate is the rate of return of a risk-free investment, typically represented by government bonds.
• Beta measures the volatility or systematic risk of a security or a portfolio in comparison to the market as a whole.
• The market return is the expected return of the overall market, often represented by a broad market index like the S&P 500.
• The required rate of return is the minimum return an investor expects to achieve by investing in a particular asset.