Question

# You are provided some data about the market: The expected return of the market portfolio is...

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?

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

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%

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