Question

Choose one publicly traded stock that has not been chosen by any other students and estimate...

Choose one publicly traded stock that has not been chosen by any other students and estimate its expected rate of return according to CAPM (Equation 11.7, pp373).

Publicly traded stock chosen is Adidas

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Answer #1

CAPM equation for expected rate of return

=risk free rate+Beta*risk premium

for risk free rate, use 10-year Germany government bond yield=0.52% taken from Bloomberg.com

Beta=1.16 taken from yahoo finance

Risk premium=7% which is we have assumed considering general histroical trend.

Addidas expected rate of return

=0.52%+1.16*7%

=8.64%

another method

some times current bond yield does not reflect the true long run rate, so we assume long run nominal economic growth as risk free which is 3%,

then

Addidas expected rate of return

=3.00%+1.16*7%

=11.12%

the above is answer..

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