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%
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, ...
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.