a. (Required Rate of Return Using CAPM) Compute a fair rate of
return for Apple
common stock, which has a 1.5 beta. The risk-free rate is 8 percent and the
market portfolio (New York Stock Exchange stocks) has an expected return of
b. Why is the rate you computed a fair rate?
According to CAPM, Required Rate of Return = Risk Free Return + Beta*(Market Return - Risk Free Return)
= 8 + 1.5*(16 - 8)
Fair Rate of Return = 20%
b) It is fair rate because the general idea behind CAPM is that investors need to be compensated in two ways: time value of money and risk.
Risk free rate represents the time value of money and compensate the investors for investing money in any investment over a period of time. It considers premium on market. Hence it is called fair rate.
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