Question

Question 3

a. Northern Corporation’s stock has a beta of 1.4. Short term government securities yield 5% and the 

market portfolio offers an expected return of 14%. Find the required return on Northern’s stock. (2 

marks

Answer 1

The required return on Northern’s stock is:

$RRR = 0.05 + 1.4×(0.14 - 0.05) = 0.176$

or 17.6%.