Purchase Solution

Calculation of fair rate of return by using CAPM

Not what you're looking for?

Ask Custom Question

A. Compute a fair rate of return for Intel common stock, which has a 1.2 beta. The risk-free rate is 6 percent, and the market portfolio (New York Stock Exchange stocks) has an expected return of 16 percent.
b. Why is the rate you computed a fair rate?
Please show all calculations, formulas, and details and send it via Word document. Thank you.

Purchase this Solution
Solution Summary

The solution contains the computation of fair rate of retun by using CAPM model and also citing the reasons why the rate of return so computed can be called as fair rate of return.

Purchase this Solution
Free BrainMass Quizzes
Situational Leadership

This quiz will help you better understand Situational Leadership and its theories.

Organizational Behavior (OB)

The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.

Paradigms and Frameworks of Management Research

This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.

Business Ethics Awareness Strategy

This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.

Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.

View More Free Quizzes
Related BrainMass Solutions

  • Securities

    To value their shares using DDM, we must use the required return of this company, not the market interest rate. By DDM, price = 1.59/(0.0396 - 0) = 40.15, since growth rate of dividend is not given.

  • Rate of Return and Capital Pricing

    (Required rate of return using CAPM) a. Compute a fair rate of return for Intel common stock, which has a 1.2 beta. The risk-free rate is 6 percent. b. Why is the rate you computed a fair rate? 3.

  • Index Models, CAPM and Arbitrage Pricing Theory

    Using the information in questions 1 and 2 and your forecasted expected returns, what is your best estimate of the alpha of your portfolio when using CAPM to determine a fair level of expected return? 5.

  • CAPM Cost of Equity

    CAPM would calculate Nike's current cost of equity at 2.859% RE = RF + Beta(RM - RF) RE = 20% + 0.91(7.50% - 20%) RE = 2.859% This calculation is based on a variable market rate of return and a risk free rate.

  • Portfolio Betas & expected returns

    Using CAPM, Expected return = Rf + (Rm-Rf) beta 14% = Rf + (11.5%-Rf) 1.45 14% = Rf + 16.675% - 1.45Rf Rf = (16.675%-14%)/.45 = 5.94% The solution explains the calculation of beta, expected return, risk free rate using the CAPM equation

  • Required rate of return

    Using CAPM equation rA = rRF + (rM-rRF) beta 12% = 5% + (10%-5%) beta beta = (12%-5%)/(10%-5%) = 1.4 b. Using the CAPM equation with beta = 2 rA = 5% + (10%-5%) 2 rA= 15% The solution explains the calculation of required rate of return

  • Stock and Risk Free Rate

    The solution explains the step-by-step calculation of the price of the stock at the end of the year and the calculation of stock beta.

  • Discount Rate Explanation

    One can also use CAPM in the decision of whether to accept a project. This is because CAPM is used to calculate the required rate return, which is the cost of common equity.

  • Stock Valuation using CAPM and Dividend Growth Model

    297383 Stock Valuation using CAPM and Dividend Growth Model Determine the expected return using these two methods for the three stocks below using the Capital Asset Pricing Model (CAPM) and is determined as: Kj = rf + beta (rm-rf) and by using the dividend

View More Related Solutions