Question 9.RQ.25: Assume the following facts: Risk-free return, rf , 7.75 per ......

Management Accounting and Financial Analysis for CA Final Examination [995093]

Assume the following facts:
Risk-free return, $r_f$ , 7.75 per cent
Beta, 2
Expected return of investors, r, 16 per cent
Applying CAPM, compute the expected market return ( $\mathrm{r}_\mathrm{m}$ ).

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$\qquad \> r = r_f + \beta (r_m – r_f)$
$\quad 0.16 = 0.0775 + 2(r_m – 0.0775)$
$\quad0.16 = 0.0775 + 2r_m – 0.155$
$\>\> 0.2375 = 2r_m$
$\qquad r_m = 0.11875 = 11.87$ per cent.

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