Given: risk-free rate of return = 5 % market return = 10%, cost of equity = 15% value of beta (β) is:a.1.9b.1.8c.2.0d.2.2
Question
Given: risk-free rate of return = 5 % market return = 10%, cost of equity = 15% value of beta (β) is:a.1.9b.1.8c.2.0d.2.2
Solution 1
The value of beta (β) can be calculated using the Capital Asset Pricing Model (CAPM) formula, which is:
Cost of Equity = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)
We can rearrange the formula to solve for beta:
Beta = (Cost of Equity - Risk-Free Rate) / (Market Return - Risk-Free Rate)
Substituting the given values into the formula:
Beta = (15% - 5%) / (10% - 5%) = 2.0
So, the correct answer is c. 2.0.
Solution 2
The beta (β) of an investment is a measure of the risk arising from exposure to general market movements as opposed to idiosyncratic factors. It is calculated using the formula:
Beta = (Cost of Equity - Risk-free rate) / (Market Return - Risk-free rate)
Given the values in the question:
Risk-free rate of return = 5% Market return = 10% Cost of equity = 15%
We can substitute these values into the formula:
Beta = (15% - 5%) / (10% - 5%)
Beta = 10% / 5% = 2.0
So, the value of beta (β) is 2.0, which corresponds to option c.
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