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National Austrlia Bank (NAB) is a prominent company listed o

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National Australia Bank (NAB) is a prominent company listed on the Australian Stock Exchange (www.asx.com).

Using the one-factor CAPM, work out the expected rate of return for the company for the seven-month period beginning Monday 27 may 2007 through to 31 Dec 2007. Explain how you arrived at the values for the variables in the model. For example, how you determined the risk premium and the period you used to estimate data.

The current Australian 3-yrs government bond rate (risk free rate) is 5.93%.

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Solution Preview

Capital Asset Pricing Model is a model that describes the relationship between risk and expected return and that is used in the pricing of risky securities.

We have the formula:
Rnab = Rf + beta*Rmp
where Rnab is the expected rate of return for NAB.
Rf = 5.93%
Rmp = Market risk premium
Rmp needs to be determined.

beta for NAB = 0.7677 from the website:

The market risk premium is also called equity premium, market premium and risk premium. The term ...

Solution Summary

The solution provides step-by-step instructions for the NAB problem.