Explore BrainMass
Share

Explore BrainMass

    CAPM

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    See the table below for computing the average returns and the standard deviation for ABC Corp and the market.
    Month ABC Corp Market
    1 6% 4%
    2 3 2
    3 -1 1
    4 -3 -2
    5 5 2
    6 0 2

    a. If ABC's beta is 1.54 and the risk free rate is 8% what would be the appropriate required return for an investor owning ABC.
    b. How does the ABCs historical return compare with the return you believe to be a fair return, given the organizations systematic risk

    © BrainMass Inc. brainmass.com October 9, 2019, 10:38 pm ad1c9bdddf
    https://brainmass.com/business/capital-asset-pricing-model/226894

    Solution Preview

    Please see attached file
    See the table below for computing the average returns and the standard deviation for ABC Corp and the market.

    Month ABC Corp Market
    1 6% 4%
    2 3% 2%
    3 -1% 1%
    4 -3% -2%
    5 5% 2%
    6 0% 2%

    Mean (Expected) return, standard deviation of return

    ABC Corp.
    X= X 2 =
    6% 0.0036
    3% 0.0009
    -1% 0.0001
    -3% 0.0009
    5% 0.0025
    0% 0
    Total= 10.00% 0.0080
    n=no of observations= 6
    Mean return= 1.67% =10.%/6

    variance={summation of X 2 - n(Mean) 2 }/(n-1)= 0.001265 =(0.008-6*0.0167^2)/(6-1)
    standard deviation of return=square root of ...

    Solution Summary

    Calculates required return using CAPM.

    $2.19