You are considering an investment in First Allegiance Corp. The firm has a beta

Question

You are considering an investment in First Allegiance Corp. The firm has a beta of 1.62. Currently, U.S. Treasury bills are yielding 6.75% and the expected return for the S & P 500 is 18.2%. What rate of return should you expect for your investment in First Allegiance?  

   10.9%
   25.3%
   16.8%
   29.5% You are considering an investment in First Allegiance Corp. The firm has a beta of 1.62. Currently, U.S. Treasury bills are yielding 6.75% and the expected return for the S & P 500 is 18.2%. What rate of return should you expect for your investment in First Allegiance?  

   10.9%
   25.3%
   16.8%
   29.5%

Explanation / Answer

Expected Rate of return Km = Krf + RP*beta where Krf = Risk Free premium = 6.75% & RP = Market Risk Premium Krf =6.75%, beta =1.62, Km = 18.2% So Mkt Risk Prem =(Km-Krf)= 18.2%-6.75% = 11.45% So Ks = Krf + (Km-Krf)*beta = 6.75% + 11.45%*1.62 = 25.3% So Ans is 25.3%

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