Hastings Entertainment has a beta of 0.65. If the market return is expected to be 11 percent and the risk-free rate is 4 percent, what is Hastings' required return

The answer is 8.55 percent

Explanation:

This is Capital Assets Pricing Model (CAPM) shows the relationship between undiversified risk (systemai risk) and the expected rate of return for shareholders. It is used to determine the cost of equity. This model is widely used in finance.

The formula is: Risk free rate of return + beta (market return - risk free rate of return).

Note that risk free rate of return - market return is known as risk premium i. e the compensation for taking risk.

Risk free rate of return - 4 percent

market return - 11 percent

Beta - 0.65

4 + 0.65 (11 - 4)

4 + 0.65 (7)

4 + 4.55

=8.55 percent