Company X has a beta of 1.75, while Company Y has a beta of 2.1. The return on the market is 14%, and the risk-free rate is 7%. By how much does Company’s required return exceed Company’s required return?
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Expert's answer
2020-05-11T07:41:06-0400
"ri=rRF+(rM-rRF)\\times (\\beta)"
"ri_1=7+(14-7)\\times (1.75)=19.25\\%"
"ri_2=7+(14-7)\\times (2.1)=21.7\\%"
"21.7\\%-19.25\\%=2.45\\%"
Company’s Y required return exceeds Company’s X required return by "2.45\\%."
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