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According to the Capital Asset Pricing Model, if the risk-free rate of return is 2%, the market rate of return is 6%, and the investment’s beta is 1.5, what is the required rate of return of an investment?
Answer: A. To calculate the required rate of return, according to the CAPM, subtract the risk-free rate from the market rate to get the market premium, then multiply the market premium by the beta and add that product to the risk-free rate to get the required rate of return of the investment.
.06 – .02 = .04