CAPM model was introduced by Jack Trynor, William Sharpe and Jan Mossin .CAPM model is the model for pricing the individual security or the portfolio. It is used to determine required rate of return of an asset when the asset is to be included in the well diversified portfolio. Here, Beta is used to denote asset's sensitivity to non diversifiable risk. In CAPM model Security Market line is used to determine the price of the individual security with respect to its risk class. Security Market line depicts relation between the beta and the assets' expected rate of return. Therefore, CAPM model informs the relation of risk to return to any security in the market. Price under CAPM model is computed by the ...

Solution Summary

The answer contains the meaning and formula for computing expexted rate of return on security by using CAPM model, assumptions underlying CAPM model and also why the assumptions are not realistic

1. The expected return on the stock market is 10% with a standard deviation of 27%. The risk-free rate is 3%. AB Corp. has covariance (COV) of 0.075 with the market return. The stock currently trades at $100 and is expected to increase to $114. What is the required return on the stock?

Using data from our fictitious Company, MT 217 (from attached sheet), we will calculate the expect value of its stock using the Constant Growth Model (attached): Po = D1/(r - g)
To do that we will have to estimate the vales of r, g, and D1.
To estimate the value of r we will use the CapitalAssetPricing Model:
CAPM = R

Question: Use the capital-assetpricing 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 calcu

I need 100 word original notes in answering the following questions:
1. What is operating leverage and how does it influence a project?
2. What are the two methods for estimating debit cost of capital, and what do you do when there is default risk? Explain the circumstances in which you would use each method.
3. In what

Breifly describe the capitalassetpricing model (CAPM), its practical use, and its limitations.
Does not have to be long and drawn out, just understandable.

In the CapitalAssetPricing Model (CAPM) why do we use beta ß, rather than standard deviation of returns, as our measure of risk? Why is it that the formula for beta fits in with the meaning of beta as non-diversitifiable risk?

The CapitalAssetPricing Model (CAPM) is a widely used concept in finance. The model is expressed graphically by the Security Market Line (SML). Within the context of investment, explain how CAPM can be useful to investors.

Suppose you have invested $50,000 in the following four stocks:
Security Amount Invested Beta
Stock A $10,000 0.7
Stock B 15,000 1.2
Stock C 12,000 1.4
Stock D 13,000 1.9
The risk-free rate is 5 percent and the expected return on the market portfolio is 18 percent.