Aset P has a beta of 0.9. The risk-free rate of return is 8%, while the return on the S&P 500 is 14%. Asset P's required rate of return is:
13.4%
To calculate the required rate of return for asset P, we can use the Capital Asset Pricing Model (CAPM) formula, which is:
\[ required \ rate \ of \ return = risk-free \ rate + beta \times (market \ return - risk-free \ rate) \]
Given:
Beta (β) = 0.9
Risk-free rate of return = 8%
Return on the S&P 500 = 14%
Plugging in the values into the formula:
\[ required \ rate \ of \ return = 8\% + 0.9 \times (14\% - 8\%) \]
Simplifying the expression:
\[ required \ rate \ of \ return = 8\% + 0.9 \times 6\% \]
\[ required \ rate \ of \ return = 8\% + 5.4\% \]
\[ required \ rate \ of \ return = 13.4\% \]
Therefore, the required rate of return for asset P is 13.4%.
To calculate Asset P's required rate of return, we need to use the Capital Asset Pricing Model (CAPM) formula:
Required Rate of Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate)
In this case, the risk-free rate of return is given as 8%, and the market return (return on the S&P 500) is 14%. The beta for Asset P is given as 0.9.
Let's plug these values into the formula:
Required Rate of Return = 8% + 0.9 × (14% - 8%)
Calculating the expression inside the parentheses:
Required Rate of Return = 8% + 0.9 × 6%
Required Rate of Return = 8% + 0.9 × 0.06
Required Rate of Return = 8% + 0.054
Required Rate of Return = 8.054%
Therefore, Asset P's required rate of return is 8.054%.