Question

Question 26 3 pts Bradford Manufacturing Company has a beta of 1.3, while Farley industries has a beta of 1.1. The required return on an index fund that holds the entire stock market is 10.1%. The risk-free rate of interest is 3.1%. By how much does Bradford's required return exceed Farley's required return?

Answer 1

Bradford's required return = Risk-free rate + Beta(Market return - Risk-free rate) = 0.031 + 1.3(0.101 - 0.031) = 0.122 or 12.2%

Farley's required return = Risk-free rate + Beta(Market return - Risk-free rate) = 0.031 + 1.1(0.101 - 0.031) = 0.108 or 10.8%

Bradford's required return exceeds Farley's required return by = 12.2% - 10.8% = 1.4%