The following table shows betas for several companies. Calculate each stock’s ex
ID: 2753553 • Letter: T
Question
The following table shows betas for several companies. Calculate each stock’s expected rate of return using the CAPM. Assume the risk-free rate of interest is 10%. Use a 13% risk premium for the market portfolio. (Round your answers to 2 decimal places.)
The following table shows betas for several companies. Calculate each stock’s expected rate of return using the CAPM. Assume the risk-free rate of interest is 10%. Use a 13% risk premium for the market portfolio. (Round your answers to 2 decimal places.)
Explanation / Answer
Expected Return = Risk-free rate of interest + Beta of company * (Expected rate of return on market portfolio - Risk-free rate of return)
(NOTE 1):- Risk premium = Expected rate of return on market portfolio - Risk-free rate of return
= 13 % (Given)
Expected Return (Using CAPM ) Cisco = 10 + 1.62 * 13 = 31.06 % Apple = 10 + 1.84 * 13 = 33.92 % Hershey = 10 + 0.79 * 13 = 20.27 % Coca-cola = 10 + 0.99 * 13 = 22.87 %
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