Author Question: Adam wants to determine the required return on a stock portfolio with a beta coefficient of 0.5. ... (Read 78 times)

Metfan725 · **on:** Jul 10, 2018

Adam wants to determine the required return on a stock portfolio with a beta coefficient of 0.5. Assuming the risk-free rate of 6 percent and the market return of 12 percent, compute the required rate of return.

What will be an ideal response?

Question 2

Payback is considered an unsophisticated capital budgeting because it ________.

A) gives explicit consideration to the timing of cash flows and therefore the time value of money
B) gives explicit consideration to risk exposure due to the use of the cost of capital as a discount rate
C) does not gives explicit consideration on the recovery of initial investment and possibility of a calamity
D) it does not explicitly consider the time value of money

trog · **Reply #1 on:** Jul 10, 2018

Answer to Question 1

r = RF + b(rm - RF)
= 0.06 + 0.5(0.12 - 0.06 ) = 0.09 = 9
The company should expect at least 9 percent return on the stock portfolio.

Answer to Question 2

D