Purchase Solution

Capital-asset-pricing model

Not what you're looking for?

Ask Custom Question

Consider the following two stocks:
Beta Expected Return
Merck Pharmaceutical 1.4 25%
Pizer Drug Corp 0.7 14%
Assume the capital-asset-pricing model holds. Based on the CAPM, what is the risk-free rate? What is the expected return on the market portfolio?

Purchase this Solution
Solution Summary

The solution calculates risk-free rate and the expected return on the market portfolio using CAPM (capital-asset-pricing model) and given betas and expected returns of two stocks.

Solution Preview

Consider the following two stocks:
Beta Expected Return
Merck Pharmaceutical 1.4 25%
Pizer Drug Corp 0.7 14%
Assume the capital-asset-pricing model holds. Based on the CAPM, what is the risk-free rate? What is the expected return on the market portfolio?

CAPM (Capital Asset Pricing Model equation is:
r A= r f + beta A (r m - r f)

For Merck
25% = rf + ...

Purchase this Solution
Free BrainMass Quizzes
Operations Management

This quiz tests a student's knowledge about Operations Management

Balance Sheet

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

Understanding Management

This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.

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.

Cost Concepts: Analyzing Costs in Managerial Accounting

This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.

View More Free Quizzes
Related BrainMass Solutions

  • CAPM Analysis

    Capital asset pricing model. Retrieved from: https://emapplications.com/index.php?q=research/asset-pricing-models/capital-asset-pricing-model Fama, E., and French, K. (2013) The capital asset pricing model: Theory and Evidence. [Online].

  • Capital Asset Pricing Model explained in this answer

    142906 Capital Asset Pricing Model explained in this answer Capital asset pricing model 1. Assume that Rf = 5 percent and Km = 10.5 percent. Compute Kj for the following betas. 0.6 1.3 1.9 Capital asset pricing model 1.

  • Capital-asset-pricing model and WACC

    Expected return on the market portfolio using capital-asset-pricing model and WACC

  • Capital Asset Pricing Model (CAPM)

    282013 Capital Asset Pricing Model (CAPM): described it practical uses and limitations Breifly describe the capital asset pricing model (CAPM), its practical use, and its limitations. Does not have to be long and drawn out, just understandable.

  • Capital Asset Pricing Model to Find Expected Return

    This question is an example of the Capital Asset Pricing Model. Please see the attached solution. The solution describes the Capital Asset Pricing Model and how to apply it to obtain the answer to this question.

  • Capital Asset Pricing Model Exercises

    93006 Capital Asset Pricing Model Exercises Show ALL steps when calculating which is very important. This is capital asset pricing model exercise.

  • CAPM for a stock perceived to be more risky than average

    This will lead to higher cost of capital. Answer a conceptual question about Capital Asset Pricing Model are examined. The capital asset pricing model is explained.

  • Financial Management: The Treasury Bill

    Using the capital asset pricing model: What is the required return on an investment with a beta of 1.5?

  • Capital Asset Pricing Model (CAPM) and Beta

    481032 Capital Asset Pricing Model (CAPM) and Beta In the Capital Asset Pricing Model (CAPM) why do we use beta ß, rather than standard deviation of returns, as our measure of risk?

  • Stock price and Technical Analysis

    1) The ______ is commonly used to determine what a stock's price should have been a capital asset pricing model b Treynor Index c Sharpe Index d B and C Answer: a capital asset pricing model Capital asset pricing model gives the required

View More Related Solutions