Question

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?

Answer 1

$$ri=rRF+(rM-rRF)\times (\beta)$$

$$ri_1=7+(14-7)\times (1.75)=19.25\%$$

$$ri_2=7+(14-7)\times (2.1)=21.7\%$$

$$21.7\%-19.25\%=2.45\%$$

 Company’s Y required return exceeds Company’s X required return by $2.45\%.$