The Risk-Free Rate and the Expected Market Rate of Return

question 18

Multiple Choice

The risk-free rate and the expected market rate of return are 0.056 and 0.125, respectively. According to the capital asset pricing model (CAPM) , the expected rate of return on a security with a beta of 1.25 is equal to

• A) 0.142.
• B) 0.144.
• C) 0.153.
• D) 0.134.
• E) 0.117.

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Definitions:

Allowance Method

An accounting technique used to account for bad debts, which estimates uncollectible accounts receivable and creates a provision for them.

Accounts Receivable

Financial dues from customers to an organization for products or services that have been dispensed but not reimbursed.

Allowance for Doubtful Accounts

A contra asset account used to estimate the portion of a company's receivables that may not be collectible.

Bad Debts Expense

This is an expense reported on the income statement, reflecting the cost of credit sales that a company does not expect to collect.