Share
Explore BrainMass

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

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