Problem:
The common stock for a particular company is known to have a beta (?) of 1.20. The expected return on the market (rM) is 9 percent and the risk-free rate (rRF) is 5 percent.
Requirement:
Question 1: Compute a fair rate of return based on this information.
Question 2: What would be a fair rate of return if the beta were 0.85?
Question 3: What would be a fair rate of return if the expected return on the market increased to 12 percent and the beta remained at 0.85?
Note: Provide support for your underlying principle.