a. Compute a fair rate of return for Intel common stock, which has a 1.6 beta....
a. Compute a fair rate of return for Intel common stock, which has a 1.6 beta. The risk-free rate is 6 percent, and the market portfolio (New York Stock Exchange stocks) has an expected return of 12 percent.
b. Why is the rate you computed a fair rate?
Homework Answers
a. Required rate of return = Risk-free rate + Beta(Market return - Risk-free rate)
Required rate of return = 0.06 + 1.6(0.12 - 0.06)
Required rate of return = 0.156 or 15.6%
b. The 15.6 percent “fair rate” predicted by the CAPM compensates the investor for the time value of money and for assuming risk. However, only no diversifiable(systematic) risk is being considered, which is appropriate.
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