# In the CAPM, what does beta measure? How is it computed? How

In the CAPM, what does beta measure? How is it computed? How would a change in inflation rate impact the security market line and a stock's beat? What impact would changing investor expectations have on the security market line and a stock's beta? What difficulties might be encountered when using the CAPM?

© BrainMass Inc. brainmass.com October 16, 2018, 7:30 pm ad1c9bdddfhttps://brainmass.com/business/capital-asset-pricing-model/in-the-capm-what-does-beta-measure-how-is-it-computed-how-118001

#### Solution Preview

In the CAPM, what does beta measure? How is it computed?

Beta - Now, you gotta know about Beta. Beta is the overall risk in investing in a large market, like the New York Stock Exchange. Beta, by definition equals 1.0000. 1 exactly. Each company also has a beta. You can find a company's beta at the Yahoo!! Stock quote page. A company's beta is that company's risk compared to the risk of the overall market. If the company has a beta of 3.0, then it is said to be 3 times more risky than the overall market.

To estimate Beta, one needs a list of returns for the asset and returns for the index; these returns can be daily, weekly or any period. Next, a plot should ...

#### Solution Summary

The solution provides detailed explanations, instructions and examples for the problem.

Capital Asset Pricing model (CAPM) web exercise

Capital Asset Pricing Model (CAPM) Web Exercise

In this web exercise, we will show how to determine the required rate of return

for a stock using the capital asset pricing model.

In the response, be sure to include your calculations for each one of the organizations listed in Step 9 of the exercise. Im not very good with math and so please show step by step how you obtain the answers.

1. The formula for the capital asset pricing model is:

Ki _ RF _ bi (KM _ RF ) (217)

Ki is the required rate of return that we are solving for; RF is the risk-free

rate, and we shall assume it is 4.6 percent; bi is the systematic risk of a stock

that we will estimate; (KM _ RF ) is the equity risk premium or the amount the

market is assumed to earn over the risk-free rate in the long term. We will use

6.4 percent in this example.

2. Now we are in a position to estimate the beta for a company and compute Ki,

the required rate of return. While Value Line, Bloomberg, and other financial services provide estimates of beta, they are often very different. In this exercise, we are going to

have you eyeball a value for beta. Go to finance.yahoo.com .

3. Enter Oracle (ORCL) in the Enter System box and click Go.

4. Along the left margin, click on Basic Chart.

5. Then on the Range line, click on 2y.

6. Then on the Compare line, select S&P and click Compare.

7. Eyeball the relative volatility of ORCL to the Standard and Poor Index (GSPC)

and estimate a beta (such as 1.1 or 1.3) based on the relative volatility of the

stock versus the index.

8. Use this beta and the previously presented information on RF and (KM _ RF ) to

compute Ki.

9. Follow this procedure for:

a. McDonalds (MCD)

b. Bank of America (BAC)

c. Coca-Cola (KO)

10. What conclusion can you draw between the relationship of beta (bi ), a risk

measure, and the required rate of return (Ki )?