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The Capital Asset Pricing Model (CAPM)

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Olter, Inc. is starting its risk management program for the company and has asked for your help in determining critical risk measurements for the firm. The company has identified several factors in the market that they believe are critical for your tasks:

•The risk-free rate is 6%
•The required return on the average stock is 13%
•Olter's average return is 13%

1.What is Olter's beta coefficient?
2.How does the beta coefficient influence the firm's stock value?
3.What is the required rate of return for Olter?
4.In terms of risk, how does Olter compare to the average firm in the market?
5.If Olter's beta increased to 1.6, what would you expect to happen to the required rate of return and what does this mean for the firm?

Use a Microsoft Excel spreadsheet that illustrates your calculations. You may use the formulas embedded in Microsoft Excel and/or a financial calculator for these calculations.

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Solution Summary

The capital asset pricing model for a risk-free rate is given. How the beta coefficient influences the firm's stock value are given.

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