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    CAPM (Capital Asset Pricing Model)

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    Propose we only have the information of beta and expected return, if we know the value of the risk-free-rate, can we determine which one of the following stocks is priced higher.

    Stock A : Beta 1.08, Expected Return 12.8%
    Stock B : Beta 0.66, Expected Return 9.6%

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    Solution Preview

    CAPM (Capital Asset Pricing Model) gives
    r(required return) = rf (RFR) + beta x MRP (Market Risk Premium)

    So, there are 3 variables (RFR, beta and ...

    Solution Summary

    We use CAPM (Capital Asset Pricing Model) to determine which one of the stocks is priced higher.