Using the CAPM theory, if the Volatility of a stock is twice as great as the market, the market return on stocks in general (using the S&P 500 as a proxy) is 12 %, and treasury bills are yielding 2%, what is the return that investors in that security can expect? r = Rf + beta x (Km - Rf) where r is the expected (required) return rate on a security (based on how risky it is); Rf is the rate of a "risk-free" investment, i.e. cash; Km is the return rate of the appropriate asset class (Market Return) Beta measures the volatility of the security, relative to the asset class. 12% 16% Capital Assets Pricing Model 22% 20%
Using the CAPM theory, if the Volatility of a stock is twice as great as the market, the market return on stocks in general (using the S&P 500 as a proxy) is 12 %, and treasury bills are yielding 2%, what is the return that investors in that security can expect? r = Rf + beta x (Km - Rf) where r is the expected (required) return rate on a security (based on how risky it is); Rf is the rate of a "risk-free" investment, i.e. cash; Km is the return rate of the appropriate asset class (Market Return) Beta measures the volatility of the security, relative to the asset class. 12% 16% Capital Assets Pricing Model 22% 20%
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Using the CAPM theory, if the Volatility of a stock is twice as great as the market, the market
return on stocks in general (using the S&P 500 as a proxy) is 12 %, and treasury bills are yielding
2%, what is the return that investors in that security can expect?
C
r = Rf + beta x (Km - Rf)
where r is the expected (required) return rate on a security (based on how
risky it is);
Rf is the rate of a "risk-free" investment, i.e. cash;
Km is the return rate of the appropriate asset class (Market Return)
Beta measures the volatility of the security, relative to the asset class.
12%
16%
22%
Capital Assets Pricing Model
20%
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