# Calculate CAPM and Expected Return using betas of 4 companies

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The following table shows betas for several companies. Calculate each stock's expected rate of return using the CAPM. Assume the risk-free rate of interest is 5%. Use a 9% risk premium for the market portfolio.

Company Beta

Cisco 2.03

CitiGroup 1.36

Merck .40

Disney .84

Please show all work.

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#### Solution Preview

CAPM model says that the return to investors (and to the corporation, Rc) has to be equal to:

? the risk-free rate

? PLUS a premium for stocks as a whole that is higher than the risk-free rate. This market return premium is (rM - rf)

? And the ...

#### Solution Summary

The solution lays out the parameters and explanation, then solves the four problems.

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