If a companys beta were to double, would its expected return double?

QUESTION

If a companys beta were to double, would its expected return double?

Beta of a firm is used to determine the required rate of return using CAPM model, CAPM model uses the following formula to determine the required rate of return:-Required rate of return = Risk free rate of return Beta*Market risk premiumDoubling the beta will lead to increase in the required rate of return but will not double the required rate of return and this can also be shown using the following example:-Situation 1:Beta = 1Risk free return = 5%Market risk premium = 3%Required rate of return = 5% (3%*1)Required rate of

urn = 8%Situation 2:Beta = 2Risk free return = 5%Market risk premium = 3%Required rate of return = 5% (3%*2)Required rate of return = 11%It can be seen from the above example that doubling the beta will definitely increase the required rate of return but it will not double the required rate of return.

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