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Hi. I’m confused about how they got the 14% in this question.
The risk-free rate of return is 6% and the required return on a security with a beta factor of 1.2 is 15.6%.
What is the required annual rate of return on the market portfolio?
A.11.5%
B.13.0%
C.14.0%
D.17.5%WORKING
Using CAPM 15.6% = 6% + 1.2 (Rm ? 6)%. Therefore, Rm = 14%
So
CAPM = RF + (RM -RF) Be15.6% = 6 + [? -6] 1.2
So 15.6 – 6 =9.2
So 9.2= [? -6] 1.2
So 9.2 / 1.2 = 8
Therefore RM must be 8+6 = 14
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