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Important Information About CAPM Model

Suppose you have invested $30,000 in the following four stocks.

Security Amount Invested Beta

stock A 5,000 0.75
stock B 10,000 1.10
stock C 8,000 1.36
stock D 7,000 1.88

The risk-free rate is 4 percent and the expected return on the market portfolio is 15 percent, what is the expected return on the above portfolio.

a. what financial concept or principle is the problem asking to solve.

b. in the context of the problem scenario, what are some business decisions that a manager would be able to make after solving the problem.

c. is there any additional information missing from the problem that would enhance the decision-making process?

d. without showing mathemathical calculations, explain in writing how you would solve the problem.

Solution Preview

The financial concept is capital asset pricing model or CAPM. It is used to estimate the cost of equity. It describes the relationship between the required rate of return and the non diversifiable ...

Solution Summary

This explains the concept of Capital asset pricing model in detail.