he following table shows betas for several companies. Calculate each stock's expected rate of return using the CAPM. Assume the sk-free rate of interest is 6%. Use a 8% risk premium for the market portfolio. (Do not round intermediate calculations. Enter your nswers as a percent rounded to 2 decimal places.) Company Beta Cost of Capital Caterpillar Apple 1.66 % 1.30 Johnson & Johnson 0.49 % Consolidated Edison 0.21 %
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.
A model that represents the relationship of the required return and beta of a particular asset is termed as the CAPM (capital asset pricing model).
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