Quantitative Problem: You are given the following information for Wine and Cork

Question

Quantitative Problem: You are given the following information for Wine and Cork Enterprises (WCE): rRF = 2%; rM = 10%; RPM = 8%, and beta = 1.2 What is WCE's required rate of return? Round your answer to 2 decimal places. Do not round intermediate calculations % Show All Feedback If inflation increases by 1% but there is no change in investors' risk aversion, what is WCE's required rate of return now? Round your answer to two decimal places. Do not round intermediate calculations % Show All Feedback Assume now that there is no change in inflation, but risk aversion increases by 1%. What is WCE's required rate of return now? Round your answer to two decimal places. Do not round intermediate calculations % Show All Feedback If inflation increases by 1% and risk aversion increases by 1%, what is WCE's required rate of return now? Round your answer to two decimal places. Do not round intermediate calculations

Explanation / Answer

Question 1: The rate of return as per CAPM = Rf + beta*(Rm -Rf) = 2+ 1.2*(10-2) = 11.6%

Question 2: If inflation increase by 1%, the risk free return will be 2+1 = 3%,

So required return will be (Re) = Rf + beta*(Rm -Rf) = 3+ 1.2*(10-3) = 11.4%

Question 3: When risk aversion increase by 1%, Beta increase by 1% to 1.2*1.01 = 1.212

So required return will be (Re) = Rf + beta*(Rm -Rf) = 2+ 1.212*(10-2) = 11.696% = 11.70%

Question 4: When risk aversion increase by 1%, Beta increase by 1% to 1.2*1.01 = 1.212 and Rf becomes 3%

So required return will be (Re) = Rf + beta*(Rm -Rf) = 3+ 1.212*(10-3) = 11.696% = 11.48%

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