Using the PC Quote Web Page find the beta for Merck & Co. Inc. 2 page, double space.

a. What is Merck's estimated beta coefficient?

b. Use the CAPM equation in order to find out what is the present 'cost of equity' of Merck? Explain the meaning of the 'cost of equity'.

c. Choose two other companies. If you invest 1/3 of your money in each of these companies' stocks, what would the beta of the portfolio be? What would be the expected rate of return?

Solution Preview

Capital Asset Pricing Model: Merck & Co.

According to Yahoo! Finance (2010), the beta of Merck and Company, Inc. (NYSE: MRK) is 1.00. This means that if ever I decide to include Merck's common share in to my portfolio, three scenarios can result:

1. if there is only one asset in my portfolio, which is Merck's stocks, then the [portfolio's overall beta would also be 1.00
2. if there are other assets in the portfolio and that the portfolio beta is above 1.00 before the addition of Merck, then the new portfolio beta will now be closer to 1.00 and less than the original figure
3. if there are other assets in the portfolio and that the portfolio beta is less than 1.00 before the addition of Merck, ...

Solution Summary

This solution discusses CAPM and Merck & Co. in 398 words with three references.

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

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?

Question: Use thecapital-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

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

In theCapitalAssetPricing 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?

TheCapitalAssetPricing 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.

Using the CAPM equation, if the risk free rate is 1% per annum, the market risk premium is 4% and a stocks beta is 1.1, what is the expected return on the stock? If the stock is suddenly seen as less risky and it moves one to one with the market (ie its beta=1) what would be the required return?
Please provide clear working