Question

Can the expected return on individual stocks on the CAPM be higher than the expected return on the market index portfolio? If it can be high, is it just because of beta?

And what are some of the indicators that individual stocks always have lower than capm?

Answer 1

As per CAPM Model,

Expected Return = Risk free rate + Beta * ( Market Return - Risk Free Rate )

For Market Return Beta = 1

If Beta > 01

Expected Return > Market Return

Yes in the CAPM model expected return can be Higher than market return and it is only for Beta only.

Expected Return depends on three factors, Risk-Free Rate, Market Return, and Beta. When we are fixing the Risk-free rate and Market Index portfolio the only option remains to us is Beta.

what are some of the indicators that individual stocks always have lower than CAPM

• Price movenment of the stock is very low i.e volatility of the stock is less.
• A large cap stock with high percentage of institutional holding may have low beta