# Utilizing finance databases to determine required return

Not what you're looking for?

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 )?

##### Purchase this Solution

##### Solution Summary

The problem deals with estimating the required rate of return for shares through CAPM.

###### Education

- B. Sc., University of Nigeria
- M. Sc., London South Bank University

###### Recent Feedback

- "Thank you."
- "thank you Chidi Ngene.. if you have any APA references would be great"
- "Thank you so much for your help, your explanations were easy to understand and apply!"
- "are you able to highlight the equations used either on the xlsx or a word doc as to how each graph was formed- overall looks fine i just need help understanding this myself"
- "Chidi Ngene, M. Sc. Was extremely helpful as without the help and guidance I would have failed, but with the help I passed. I still have a lot to learn and in need of the guidance to understand and learn more on the subject. I would recommend Chidi Ngene and BrainMass to anyone that are in need of help. Thank you!!"

##### Purchase this Solution

##### Free BrainMass Quizzes

##### Introduction to Finance

This quiz test introductory finance topics.

##### Basics of corporate finance

These questions will test you on your knowledge of finance.

##### Social Media: Pinterest

This quiz introduces basic concepts of Pinterest social media

##### Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.

##### MS Word 2010-Tricky Features

These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.