Question

An investor is trying to estimate the required return to purchase NWO stock. He has gathered some data, but is having trouble figuring out how to apply it to CAPM. Help the investor and calculate the required return for his investment.

Information:
90-day Treasury Bill yield	2.11%
S&P 500 Expected Return	8.77%
NWO Beta	1.23

Answer 1

Let's assign an interpretation to the data collected:

Information:		Interpretation
90-day Treasury Bill yield	2.11%	Surrogate for risk free rate, Rf = 2.11%
S&P 500 Expected Return	8.77%	Surrogate for expected return from market, RM = 8.77%
NWO Beta	1.23	Beta of the stock, Beta = 1.23

CAPM states:

Expected return on a security = R_f + Beta x (R_M - R_f) = 2.11% + 1.23 x (8.77% - 2.11%) = 0.103018 = 10.30%

Hence, the required return for his investment = 10.30%