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    Capital-asset pricing model

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    Question: Use the capital-asset pricing model to predict the returns next year of the following stocks, if you expect the return to holding stocks to be 12 percent average, and the interest rate on three-month T-bills will be two percent. Calculate a stock with a beta of 0.3, 0.7, and 1.6. Show your work for three separate calculations.

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    Solution Preview

    Using the CAPM equation
    Return = Rf + (Rm-Rf) beta
    Rf = risk free rate = ...

    Solution Summary

    The solution explains the use of capital-asset pricing model to calculate the returns.