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29 September, 14:27

Castle Black Camping is twice as risky as the average stock. The market should earn 11% and the risk free rate is 2%. What is a fair return for CBC? (20%)

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  1. 29 September, 14:30
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    Risk free rate=2%

    Beta = 2

    Rm = 11%

    Risk premium Rm = rm - rf

    Fair return = risk free rate + beta * (market return - risk free rate)

    = rf+b * (rm-rf) = rf + b * (Risk Premium)

    =0.02 + 2 * (0.11 - 0.02)

    =0.2

    = 20%

    A fair return for CBC is 20%.
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