Question

Examples of capital asset pricing model (CAPM), when it comes to the required rate of return.

Answer #1

The expected return of a stock can be calculated by the CAPM (CAPITAL ASSET PRICING MODEL) . The CAPM model formula is:

Re = Rf + beta * (Rm - Rf)

Where Re is the required rate of return,

Rf is the risk free rate, Rm is the return on the market.

For example, an investor is thinking of buying a share which is priced at $50 per share. The stock pays a dividend of $3, the stock has a beta compared to the market of 1.5. A beta of 1. 5 means that the stock is more risky than the market. The risk free rate is 5% and we can also expect the market rises by 9% per year.

So, the required return on the stock is:

Re = 5 + 1.5* (9% - 5%)

Re = 11%

So, the required return of this stock is 11%.

(Capital asset pricing model)
Using the CAPM, estimate the appropriate required rate of
return for the three stocks listed here, given that the risk-free
rate is 6
percent and the expected return for the market is 17
percent.
STOCK
BETA
A
0.75
B
0.94
C
1.31
(Click on the icon located on the top-right corner of the data
table above in order to copy its contents into a
spreadsheet.)
a. Using the CAPM, the required rate of return for stock...

Manipulating CAPM Use the basic equation for the capital asset
pricing model (CAPM) to work each of the following problems.
a. Find the required return for an asset with a beta of 0.54
when the risk-free rate and market return are 6 % and 8 % ,
respectively.
b. Find the risk-free rate for a firm with a required return
of 6.368 % and a beta of 0.26 when the market return is 11 % .
c. Find the market...

Use the basic equation for the capital asset pricing model
(CAPM) to work each of the following problems.
a. Find the required return for an asset with a beta of 0.84
when the risk-free rate and market return are 77% and 15 %
respectively.
b. Find the risk-free rate for a firm with a required return of
7.394% and a beta of 1.16 when the market return is 7 %.
c. Find the market return for an asset with a...

Use the basic equation for the capital asset pricing
model(CAPM) to work each of the following problems.
a. Find the required return for an asset with a beta of 1.51
when the risk-free rate and market return are 8% and 10%
respectively.
b. Find the risk-free rate for a firm with a required return of
9.791% and a beta of 0.97 when the market return is 10%.
c. Find the market return for an asset with a required return of...

Manipulating CAPM???Use the basic equation for the capital asset
pricing model ?(CAPM?) to work each of the following problems.
a.??Find the required return for an asset with a beta of 0.810.81
when the? risk-free rate and market return are 99?% and 17 %17%?,
respectively. b.??Find the ?risk-free rate for a firm with a
required return of 12.98212.982?% and a beta of 1.891.89 when the
market return is 10 %10%. c.??Find the market return for an asset
with a required return...

CAPM. The Capital Asset Pricing Model (CAPM) is a financial
model that assumes returns on a portfolio are normally distributed.
Suppose a portfolio had an average annual rate of return of 14.7%
(i.e an average gain of 14.7%) with a standard deviation of 33%. A
return of 0% means the value of the portfolio doesn't change, a
negative return means that the portfolio loses money, and a
positive return means that the portfolio gains money.
What percent of years does...

According to the capital asset pricing model (CAPM), where does
an asset’s expected return come from? Please explain each
component.

The capital asset pricing model suggests that the required
return on a firm's stock is a positive function of:
unsystematic risk
the market rate of return
the competitor fs cost of equity
All of these are correct.

Discuss how costs of capital relate to Capital Asset
Pricing Model (CAPM).

Compare and contrast Capital Asset Pricing Model (CAPM) with
Arbitrage Pricing Theory (APT). What is the single most important
issue with CAPM? Which model is more realistic? Why?

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