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# Analysis CAPM model, Beta and Expected Return on Shares

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What would you expect the effect to be of the following changes on the market price of a company's shares, all other things being the same? Provide an explanation of your expectation.

a. Investors demand a higher required rate of return on shares in general
b. The covariance between the company's rate of return and that for the market decreases
c. The standard deviation of the probability distribution of rates of return for the company's stock increases
d. Market expectations of the growth of future earnings (and dividends) of the company are revised downwards.

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#### Solution Preview

I have put my comments in your original file.

Generally, you need to think about what each change means in terms of the CAPM equation and remember that CAPM says the return level is compensation for risk.
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Question

What would you expect the effect to be of the following changes on the market price of a company's shares, all other things being the same? Provide an explanation of your expectation.

a. Investors demand a higher required rate of return on shares in general
b. The covariance between the company's rate of return and that for the market decreases
c. The standard deviation of the probability distribution of rates of return for the company's stock increases
d. Market expectations of the growth of future earnings ...

#### Solution Summary

An analysis of CAPM model, Beta and Expected return on shares are given. The expert examines the investors demand for a higher required rate of return on shares in general.

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