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    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.