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assume that an investment can be made in a property, that the risk - free rate is equal to 10%, the rate of return expected by the market for this type of property is 18%, and the beta is 1.2. given the above information, what do ordinary shareholders expect the return to be?
a. 19.6%
b. 19.5%
c. 18.3%
d. 18.9%
clear my choice

Explanation:

Step1: Recall the Capital - Asset Pricing Model (CAPM) formula

$R_i = R_f+\beta\times (R_m - R_f)$ where $R_i$ is the expected return of the investment, $R_f$ is the risk - free rate, $\beta$ is the beta of the investment, and $R_m$ is the market return.

Step2: Substitute the given values into the formula

Given $R_f = 0.10$, $\beta=1.2$, and $R_m = 0.18$.
$R_i=0.10 + 1.2\times(0.18 - 0.10)$
$R_i=0.10+1.2\times0.08$
$R_i=0.10 + 0.096$
$R_i = 0.196$ or $19.6\%$

Answer:

A. 19.6%