You are using the CAPM to calculate a fair return for Stardust common stock. The shares have a volatility of 28.00%, while the market has a volatility of 15.00%. The correlation between the two sets of returns is 0.3. The risk free rate is 2.60%, while the expected return on the market is 4.80%. What is the fair return for Stardust common stock?
You are using the CAPM to calculate a fair return for Stardust common stock. The shares have a volatility of 28.00%, while the market has a volatility of 15.00%. The correlation between the two sets of returns is 0.3. The risk free rate is 2.60%, while the expected return on the market is 4.80%. What is the fair return for Stardust common stock?
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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You are using the CAPM to calculate a fair return for Stardust common stock. The shares have a volatility of 28.00%, while the market has a volatility of 15.00%. The correlation between the two sets of returns is 0.3. The risk free rate is 2.60%, while the expected return on the market is 4.80%. What is the fair return for Stardust common stock?
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Step 1
Capital Asset Pricing Model helps in determining the fair value of the stock considering its systematic risk and hence the risk premium is added to the risk free rate.
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