Question

You are provided some data about the market: The expected return of the market portfolio is 11.8%, the market's volatility is 13.9%, and the risk-free rate is 2.9%.

If the beta of Johnson & Johnson (JNJ) is 0.83, according to the CAPM, what is the expected return of JNJ?

{Give your answer as a percentage with 2 decimals, e.g., if the answer is 0.0345224 (or 3.45224%) , enter 3.45 as your answer.}

Hint: basic CAPM question. See conclusion 4 of CAPM.

Answer 1

CAPM Ret = Rf + Beta ( Rm - Rf )

Rf = Risk free ret
Rm = Market ret
Rm - Rf = Risk Premium
Beta = Systematic Risk

Particulars	Amount
Risk Free Rate	2.9%
Market Return	11.8%
Beta	0.8300
Risk Premium ( Rm - Rf)	8.90%

Beta Specifies Systematic Risk. Systematic risk specifies the How many times security return will deviate to market changes. SML return considers the risk premium for Systematic risk alone.Where as CML return considers risk premium for Total risk. Beta of market is "1".

CAPM Return = Rf + Beta ( Rm - Rf )
= 2.9 % + 0.83 ( 8.9 % )
= 2.9 % + ( 7.39 % )
= 10.29 %

Rf = Risk Free
CAPM Ret of JNJ is 10.29%