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Elephant Company common stock has a beta of 1.2. The risk-free rate is 6% and the expected market rate of return is 12%. Determine the required rate of return on the security.
Elephant Company
a
Risk Free rate (Rf)
6%
b
Beta of stock (β)
1.2
c
Expected market return (Re)
12%
d
As per CAPM,
Re
=
Rf + β x (Rm - Rf)
6% + 1.2 x (12%- 6%)
6% + 1.2 x 6%
6% + 7.2%
13.20%
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