Calculate the required rate of return for Mudd Enterprises assuming that investors expect a 4.2% rate of inflation in the future. The real risk-free rate is 2.0%, and the market risk premium is 5.0%. Mudd has a beta of 2.4, and its realized rate of return has averaged 13.5% over the past 5 years. Round your answer to two decimal places
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Calculate the required
The question is related to the Portfolio Management. The required rate of return is calculated with the help of Capital Asset Pricing Model
Required rate of return = Risk free rate + beta × market risk premium
= Rf + beta × (Rm - Rf)
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