An antitrust case has lead to you having to calculate a fair return (using the CAPM) for RadioEthiopea common stock. The risk free rate is 3.20%, while the expected return on the market is 4.70%. The shares have a volatility of 21.00%, while the market has a volatility of 13.00%. The correlation between the two sets of returns is 0.44. What is the fair return for RadioEthiopea common stock?
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
An antitrust case has lead to you having to calculate a fair return (using the
Fair Return = Risk Free Return + Beta ( Market return - Risk Free Return)
Beta = Correlation between two sets x
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