Required Rate of Return Calculation using Capital Asset Pricing Model

Calculation of Required Rate of Return:

The data provided for calculating the required rate of return is as follows:

• Risk-free rate = 4 percent
• Required rate of return on the market portfolio = 15 percent
• Beta for the medical device manufacturer = 1.7

Using the Capital Asset Pricing Model (CAPM), we can calculate the required rate of return on the stock of the medical device manufacturer:

Required Rate of Return on the Stock = Risk-free rate + Beta × (Return on the Market Portfolio - Risk-free Rate)

Plugging in the values:

Required Rate of Return on the Stock = 4 + 1.7 × (15 - 4)

Required Rate of Return on the Stock = 22.7%

Therefore, the correct option is e. 22.7 percent.