Explore BrainMass
Share

# The Capital Asset Pricing Model

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

Please help! I need assistance in understanding why the Capital Asset Pricing Model would be an effective model to support or justify an organization's market price.

The calculation for CAPM for Johns & Johnson is shown below:

Beta as of 6/19 .61
3 mos yield on treasury as of 6/19 .19%
S&P 500 Index 3 mos returns as of 6/19 6.35%
0.19%(0.61 x (6.35% - 0.19%)) = 3.95%

© BrainMass Inc. brainmass.com March 21, 2019, 6:25 pm ad1c9bdddf
https://brainmass.com/business/capital-asset-pricing-model/capital-asset-pricing-model-256435

#### Solution Preview

The basic CAPM formula states that Risk-free rate of return +((Market rate of return-Risk-free rate of return)*Stock beta)=Stock rate of return.

Remember that risk and return are related; as compensation for assuming risk, you receive a commensurate return. If you assume no risk at all, ...

#### Solution Summary

This solution illustrates the computation of a firm's required return on equity using the Capital Asset Pricing Model and discusses why the model is an effective means of determining that required rate of return.

\$2.19