Explore BrainMass

Explore BrainMass

    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 June 3, 2020, 10:55 pm ad1c9bdddf

    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.