# CAPM

1. Assume that the risk-free rate of interest is 3% and the expected rate of return on the market is 9%. A share of stock is selling for $55 at the beginning of the year. It will pay a dividend of $2 per share at the end of the year. Its beta is 1.2. What do investors expect the stock to sell for at the end of the year?

2. The risk-free rate is again 3%. The expected return on the market is 9%. A particular security offers an expected return of 2 percent. Assuming that capital markets are in equilibrium, what is the beta of this security?

3. What is the difference between systematic risk and nonsystematic risk?

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#### Solution Preview

1. Assume that the risk-free rate of interest is 3% and the expected rate of return on the market is 9%. A share of stock is selling for $55 at the beginning of the year. It will pay a dividend of $2 per share at the end of the year. Its beta is 1.2. What do investors expect the stock to sell for at the end of the year?

We first find the total return required from the stock. Using the CAPM

Required Return = Rf + (Rm-Rf) X beta

Required Return = 3% + (9%-3%)X1.2 = ...

#### Solution Summary

The solution has three questions relating to Capital Asset Pricing Model