Congratulations to Dawn C., this month’s Study Question of the Month winner!
See the answer below!
***Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card.***
Question (Relevant to the Series 7, Series 65, Series 66)
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?
A. 6.5%
B. 7%
C. 8%
D. 18%
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
Been awhile but I got 8% for the risk-adjusted discount rate, or required ROR.
So, C. 8%
2+1.5(6-2)=8
8%