Levine Manufacturing Inc. is considering several investments. The rate on Treasu

Question

Levine Manufacturing Inc. is considering several investments. The rate on Treasury bills is currently 6.5 percent and the expected return for the market is 11.0 percent. What should be the required rate of return for each investment (using the CAPM)? a. Using the CAPM, the required rate of return for security A is % b. Using the CAPM, the required rate of return for security B is % c. Using the CAPM, the required rate of return for security C is %. d. Using the CAPM, the required rate of return for security D is %

Explanation / Answer

Using CAPM, Expected return= Risk free rate of interest + Beta of secirity*(Return on market - risk free rate of interest)

Here Risk free interest Rate= 6.5%

Expected return on market= 11.0%

Using CAPM required rate of return for A= 6.5%+1.58*(11%-6.5%)=13.61%

Using CAPM required rate of return for B= 6.5%+0.92*(11%-6.5%)=10.64%

Using CAPM required rate of return for C= 6.5%+0.53*(11%-6.5%)=8.89%

Using CAPM required rate of return for D= 6.5%+1.39*(11%-6.5%)=12.76%

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