I am stuck on a FIN 300 study note.
What rate of return should be required on the Bharti Airtel share, which has a Beta of 0.7, if the Rio Tinto share, which has a Beta of 1.1, returns 10% and is correctly valued, and the rate of a risk-free asset is 5%.
Our notes provide the solution, I don’t understand this at all. Here is the solution the notes provide:
Risk premium: (10 % – 5%)/1.1 = 4.54%
k = 5% + 0.7 X 4.54% = 8.2%.
I don’t understand any of this, can you please provide as much information as you can on how this was reached.
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