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CMA Pop Quiz #141: Part II Investment Decisions

Here is the answer to this week’s quiz:

Assume the following for Marcus Company stock:
Beta coefficient of stock:    1.25
Return on the market portfolio:     10%
Risk free rate on a U.S. Treasury Security:    7%

What is the required rate of return on Marcus Company stock?

  • 13.75%.
  • 10.75%
  • 7.038%.
  • 10%
Correct Answer B

Using the Capital Asset Pricing Model (CAPM), Ke = Rf + B (Km − Rf), enter the known numbers, which will supply you with the formula Ke = 7% + 1.25 (10% − 7%). The required rate of return on Marcus Company stock is 10.75%.

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