EBK CFIN
EBK CFIN
6th Edition
ISBN: 9781337671743
Author: BESLEY
Publisher: CENGAGE LEARNING - CONSIGNMENT
Question
Book Icon
Chapter 8, Problem 16PROB
Summary Introduction

Capital asset pricing model (CAPM) is one of the methods used to calculate the cost of equity which show the relationship between expected return and risk of an investment. It describes that the expected return of the security is equal to the sum of rate of return of an investment and risk premium.

r=rRF+β×RPM

Here,

The cost of equity or required rate of return is “r”.

The risk-free rate is “rRF”.

The risk premium is “RPM” which is calculated as (rMrRF).

The market return is “rM”.

The beta coefficient is “β”.

The expected market return is 12.5%, required rate of return is 11%, and beta coefficient is 0.8.

Blurred answer
Students have asked these similar questions
Explain why long-term bonds are subject to greater interest rate risk than short-term bonds with references or practical examples.
What does it mean when a bond is referred to as a convertible bond? Would a convertible bond be more or less attractive to a bond holder than a non-convertible bond? Explain in detail with examples or academic references.
Alfa international paid $2.00 annual dividend on common stock and promises that the dividend will grow by 4% per year, if the stock’s market price for today is $20, what is required rate of return?
Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning