CAPM
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See the table below for computing the average returns and the standard deviation for ABC Corp and the market.
Month ABC Corp Market
1 6% 4%
2 3 2
3 -1 1
4 -3 -2
5 5 2
6 0 2
a. If ABC's beta is 1.54 and the risk free rate is 8% what would be the appropriate required return for an investor owning ABC.
b. How does the ABCs historical return compare with the return you believe to be a fair return, given the organizations systematic risk
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Solution Summary
Calculates required return using CAPM.
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Please see attached file
See the table below for computing the average returns and the standard deviation for ABC Corp and the market.
Month ABC Corp Market
1 6% 4%
2 3% 2%
3 -1% 1%
4 -3% -2%
5 5% 2%
6 0% 2%
Mean (Expected) return, standard deviation of return
ABC Corp.
X= X 2 =
6% 0.0036
3% 0.0009
-1% 0.0001
-3% 0.0009
5% 0.0025
0% 0
Total= 10.00% 0.0080
n=no of observations= 6
Mean return= 1.67% =10.%/6
variance={summation of X 2 - n(Mean) 2 }/(n-1)= 0.001265 =(0.008-6*0.0167^2)/(6-1)
standard deviation of return=square root of ...
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