# CAPM

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

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.