Question

KMW Inc. has an estimated beta of 1.45. Given a forecasted market return of 12% and a T-bill rate 3%, using the index model and the adjusted beta, what is the forecasted return?

15.2%

16.2%

17.8%

14.7%

Answer 1

Answer-

Given

Estimated beta = 1.45

Adjusted beta = (2/3) x 1,45 + (1/3)

Adjusted beta = 0.667 x 1.45 + 0.333

Adjusted beta = 0.967 + 0.333 = 1.3

Forecasted return from Capital Asset Pricing Model (CAPM)

Forecated return = risk free rate + beta x ( market return - risk free rate)

risk free rate = T-bill rate = 3 %
market return = 12 %

Foreasted return = 3 % + 1.3 x ( 12 % - 3 %)

= 3 % + 1.3 x 9 %

= 3 % + 11.7 %

= 14.7 %

Therefore the correct option is 14.7 %