You are considering purchasing shares in a company that has a beta of 0.9. The average return for the S&P 500 is 11%, and the average return for US Treasury bills has been 2%. Based on the CAPM, what is your expected return for the 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.
You are considering purchasing shares in a company that has a beta of 0.9. The average return for the S&P 500 is 11%, and the average return for US Treasury bills has been 2%. Based on the
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