Capital Asset Pricing Model Exercises
Not what you're looking for?
Show ALL steps when calculating which is very important. This is capital asset pricing model 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.
1. The formula for the capital asset pricing model is:
Ki=Rf + bi(Km-Rf)
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. Use finance.yahoo.com to find values of beta.
3. Enter Microsoft (MSFT) in the "Enter System" bock and click "Go"
4. Along the left margin, click on "Basic Chart"
5.Then on "Range" line, click on "5y max".
6. Then on the "Compare" line, select S&P and click "Compare".
7. Eyeball the relative volatility of MSFT to the Standard and Poor Index (SPX) and estimate a beta (such as 1.1 or 1.3) based on 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. Oracle (ORCL)
b. IBM (IBM)
c. Philip Morris (Mo)
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
This solution involves step-by-step calculations for various questions involving capital asset pricing model exercises.
Purchase this Solution
Free BrainMass Quizzes
Situational Leadership
This quiz will help you better understand Situational Leadership and its theories.
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.
Organizational Behavior (OB)
The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.
Production and cost theory
Understanding production and cost phenomena will permit firms to make wise decisions concerning output volume.
Writing Business Plans
This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.