Author Question: Calculate the required rate of return for Mercury Inc., assuming that the real risk-free rate is ... (Read 235 times)

asan beg · **on:** Jul 10, 2018

Calculate the required rate of return for Mercury Inc., assuming that the real risk-free rate is equal to 4 and the market risk premium (note that is not the same as the market return) is 6.

Mercury has a beta of 1.5, and its realized rate of return has averaged 15 over the last 5 years.
A) 6
B) 16
C) 18
D) 13
E) 17

Question 2

Both assets B and C plot on the SML. Asset B has a beta of 1.3 and an expected return of 13.1. Asset C has a beta of .50 and an expected return of 7.50.

The risk-free rate is 4. If you wish to hold a portfolio consisting of assets B and C, and have a portfolio beta equal to 1.0, what is the expected return of the portfolio?
A) 4.0
B) 7.5
C) 11.0
D) 13.1

wergv · **Reply #1 on:** Jul 10, 2018

Answer to Question 1

D

Answer to Question 2

Answer: C
Explanation: C) slope = = = = 7.0.
Next, add this to the risk-free rate of 4 and you get a market return of 11 and a beta of 1.0.