Here are data on two companies. The T-bill rate is 4% and the market risk premium is 6%. Company $1 Discount Store Everything $5 Forecast return 12% 11% Standard deviation of returns 8% 10% Beta 1.5 1.0 What would be the fair return for each company, according to the capital asset pricing model (CAPM)?
Added by Peter R.
Step 1
- T-bill rate (Risk-free rate, \( R_f \)): 4% - Market risk premium (\( R_m - R_f \)): 6% For Company 1 (Discount Store): - Beta (\( \beta_1 \)): 1.5 For Company 2 (Everything $5): - Beta (\( \beta_2 \)): 1.0 Show more…
Show all steps
Your feedback will help us improve your experience
Manasvee Singh and 85 other Microeconomics educators are ready to help you.
Ask a new question
Labs
Want to see this concept in action?
Explore this concept interactively to see how it behaves as you change inputs.
Key Concepts
Recommended Videos
A firm has the following data: Risk-free rate (kRF) = 4%; Market rate of return (kM) = 9%; and beta = 1.3 What is the firm's cost of retained earnings (ks) based on the capital assets pricing model (CAPM)?
Narayan H.
You are using the CAPM to find the appropriate cost of equity for a new project that pays off a little over a year from now. Given the following information, calculate the required rate of return on equity using the CAPM. 30-day T-Bill: 1.2% 1-year Treasury Bond: 3.1% Market Risk Premium: 4% Covariance (Return on Company Stock, Return on S&P 500): 5 Variance (Return on S&P 500): 2.5 (Reminder - Be careful to express this return as a decimal.)
Adi S.
What are the risk premium and expected rate of return on a stock with beta= 1.5? Assume a Treasury bill rate of 6% and a market risk premium of 7%.
Nick J.
Recommended Textbooks
Principles of Economics
Principles of Microeconomics for AP® Courses
Economics
Transcript
18,000,000+
Students on Numerade
Trusted by students at 8,000+ universities
Watch the video solution with this free unlock.
EMAIL
PASSWORD