Asked by Rachel Hwang on Jun 18, 2024
Verified
Estimate the required return on Baniff Corp under the following conditions: The average stock is returning 11%
Short term treasury bills yield 5%
Baniff's beta is 1.25
A) 11.00%
B) 17.25%
C) 12.50%
D) 6.00%
Required Return
The minimum expected rate of return on an investment necessary to compensate for the risk of the investment.
Beta
A measurement of the volatility of a stock or portfolio compared to the market as a whole.
- Utilization of the Security Market Line (SML) to ascertain the necessary rate of return on securities.
Verified Answer
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Ashley DavisJun 19, 2024
Final Answer :
C
Explanation :
The required return on Baniff Corp can be estimated using the Capital Asset Pricing Model (CAPM), which is given by the formula: Required Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Plugging in the given values: Required Return = 5% + 1.25 * (11% - 5%) = 5% + 1.25 * 6% = 5% + 7.5% = 12.5%.
Learning Objectives
- Utilization of the Security Market Line (SML) to ascertain the necessary rate of return on securities.