The rate of return on the U. S. government treasury bill is 0.03 and the expected rate of return on the Wilshire 5000 is 0.10. What is the required rate of return for a stock with a Beta 0.99

The required rate of return is 9.93%

Explanation:

The CAPM can be used to calculate the required rate of return on a stock based on its systematic risk or beta. The formula for the required rate of return (r) using CAPM is:

r = rRF + β * (rM - rRF)

Where,

rRF is the risk free rate β is the stock's beta rM is the expected return on the market

As t bills are risk free, the t bill rate is the risk free rate while Wilshire 5000's return is the rM.

Thus,

r = 0.03 + 0.99 * (0.1 - 0.03)

r = 0.0993 or 9.93%

The required return of the stock is 9.93%

Explanation:

Given data

Government treasury bill / risk free rate = 0.03

ER on wilshire 5000 = 0.10 this is a market index so represents the expected return on the market

Beta = 0.99

The Capital aAsset Pricing Model is appropriate to use from the given information

RR = rf + β * (rm - rf)

= 0.03 + 0.99 * (0.10-0.03)

=0.0993/9.93%