If a company’s beta were to double, would its expected return double?
Expected return would not be doubled if company’s beta were to double. According to Security Market Line (SML) equation, Company’s expect return is Risk free return plus market risk premium (market risk – risk free return) times Company’s beta.
For example, Risk free return = 4%
Market risk premium = 2%
Current beta of company (β) = 0.3
Then, Company’s expected return = RF + (rm – rRF) β
= 4% + 2% X 0.3
Now supposing that, Company’s beta (β) doubled from 0.3 to 0.6
Company’s expected return = RF + (rm – rRF) β
= 4% + 2% X 0.6
So, expected return of the Company increase as beta of the company increase but it doesn’t become double. if Company’s beta double then Company’s expected return goes up from 4.6% to only 5.2%.