Question

5. The stock of Ford has a beta of 1.5. and the stock of Tesla has a beta of 0.4. The expected rate of return on the market is 8 percent, and the risk free rate is 1 percent. By how much does the required return on Ford exceed the required return on Tesla? (CAPM)

Answer 1

Answer:

As per CAPM,

Required Return = Risk Free Rate + (Expected Return on Market - Risk Free Rate ) * Beta

Given:

Risk Free Rate = 1

Expected Return on Market = 8

Beta:

For Ford = 1.5

For Tesla = 0.4

Required Return for Ford = 1 + (8 - 1) * 1.5 = 11.5%

Required Return for Tesla=1 + (8 - 1) * 0.4 = 3.8%

Hence difference = Required Return for Ford - Required Return for Tesla = 11.5% - 3.8% = 7.7%

Hence the required return on Ford exceed the required return on Tesla is 7.7%