Question #104
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 40
Status: Unattempted
Question
If the expected return on the equity market is 10% and the risk-free rate is 3%, the required return on an asset with beta of 0.6 is closest to:
Answer Choices:
A. 7.2%
B. 6.0%
C. 9.0%
Explanation
The required return on an asset is equal to the current expected risk-free return, plus the
asset's beta times the difference between the expected return on the equity market and
the risk-free rate. Required return = 0.03 + 0.6(0.10 - 0.03) = 0.072 or 7.2%.