What's the formula for a required return? I have data for a company with a beta of 1.4, risk premium is 9% and the risk-free rate is 4%?
To calculate the required return of an investment, you can use the Capital Asset Pricing Model (CAPM) formula. The CAPM formula is as follows:
Required Return = Risk-Free Rate + (Beta × Market Risk Premium)
In your case, you already have the data you need:
Beta (β) = 1.4
Risk Premium = 9%
Risk-Free Rate = 4%
Now, substitute these values into the formula and solve for the required return:
Required Return = 4% + (1.4 × 9%)
Required Return = 4% + (1.4 × 0.09)
Required Return = 4% + 0.126
Required Return = 4.126%
Therefore, the required return for the company is 4.126%.