When the return on the market portfolio goes up by 5%, the return on Stock A goes up on average by 8% and when the market portfolio return goes down by 5%, Stock A return goes down by 6%. a) Calculate the beta of this stock. b) Assuming that CAPM holds, calculate the required rate of return on this stock by assigning values for the risk-free rate and the expected return on the market portfolio depending on your own choice. (The use of the same risk-free rate and market return by different students will be treated as a cheat attempt).
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.
When the return on the market portfolio goes up by 5%, the return on Stock A goes up on
average by 8% and when the market portfolio return goes down by 5%, Stock A return goes down by 6%.
a) Calculate the beta of this stock.
b) Assuming that CAPM holds, calculate the required
the risk-free rate and the expected return on the market portfolio depending on your own choice. (The use
of the same risk-free rate and market return by different students will be treated as a cheat attempt).
Step by step
Solved in 3 steps
