Problem 8-11 CAPM and required return Calculate the required rate of return for
ID: 2614198 • Letter: P
Question
Problem 8-11
CAPM and required return
Calculate the required rate of return for Manning Enterprises assuming that investors expect a 4.8% rate of inflation in the future. The real risk-free rate is 3%, and the market risk premium is 4%. Manning has a beta of 2.4, and its realized rate of return has averaged 8.5% over the last 5 years. Round your answer to two decimal places.
Problem 8-11
CAPM and required return
Calculate the required rate of return for Manning Enterprises assuming that investors expect a 4.8% rate of inflation in the future. The real risk-free rate is 3%, and the market risk premium is 4%. Manning has a beta of 2.4, and its realized rate of return has averaged 8.5% over the last 5 years. Round your answer to two decimal places.
Explanation / Answer
Nominal risk free rate=Real risk free rate+Rate of inflation
=(3+4.8)=7.8%
Required return=Nominal risk free rate+Beta*Market risk premium
=7.8+(2.4*4)
which is equal to
=17.4%