Question

What is the expected return, based on the CAPM, for the following stock investments if the S&P 500 return is 10.8% and the Treasury Bill rate of return is 3.4% :

            Gillead: Beta – 1.23; JP Morgan Chase: Beta – 1.1; Red Roof Hotels: Beta – 0.97

Answer 1

Calculation of the expected rate of return:|

Formula (Under CAPM)

Expected return = Risk free rate + Beta x (Market rate of return - Risk free rate)

Expected return of:

Gillead = 3.40% + 1.23 x (10.80% - 3.40%)

= 3.40% + 1.23 x 7.40%

= 3.40% + 9.10%

= 12.50% (Answer)

Morgan Chase = 3.40% + 1.10 x (10.80% - 3.40%)

= 3.40% + 1.10 x 7.40%

= 3.40% + 8.14%

= 11.54% (Answer)

Red Roof Hotels = 3.40% + 0.97 x (10.80% - 3.40%)

= 3.40% + 0.97 x 7.40%

= 3.40% + 7.18%

= 10.58% (Answer)