This is the firm's beta multiplied by the risk-free rate. The Capital Asset Pricing Model formula is: R = RF + β(RM ? R F) To solve this problem, we simply need to put the variables into the CAPM formula, which is R = RF + β(RM ? R F) Substituting the values given into the formula gives a 16% rate of return: 6% + [1.25 × (14% - 6%)] = 16% This is (1.25 × .06) + (1.25 [.14 ? .06]) = .175. The Capital Asset Pricing Model formula is: R = RF + β(RM ? R F) This is the risk-free rate, one component of the calculation of the required rate of return using the Capital Asset Pricing Model. The Capital Asset Pricing Model formula is: R = RF + β(RM ? R F)
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