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What is the principal message of the Capital Asset Pricing Model (CAPM)? What are its assumptions?

What is the principal message of the Capital Asset Pricing Model (CAPM)? What are its assumptions?

Essentials Of Investments
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
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  1. What is the principal message of the Capital Asset Pricing Model (CAPM)? What are its assumptions?

 

  1. What is Beta? Is high beta good or bad for a company?

 

  1. Which type of company will have a higher Beta: a fast food chain or a luxury cruise-ship company? Why?

 

  1. Brimbank company shares has an expected return of 15%. The share’s Beta is 1.2, the risk-free rate is 3% and the market risk premium is 6%. Based on this information do you think the share is overvalued or undervalued? Why?

 

  1. A [particular share sells for $30. The shares’ Beta is 1.25, the risk-free rate is 4%, and the expected return on the market portfolio is 10%. If you predict that the share’s market price next year will be $33 (and no dividend), should you buy the share or not? Why?
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