Use the CAPM to compute the reasonable return for each of these fashion related
ID: 2807648 • Letter: U
Question
Use the CAPM to compute the reasonable return for each of these fashion related stocks Use 0.5% as the risk free rate of return use 5.5% as the market rate of return. Retrieve beta from Yahoo Finance at http://finance yahoo.com/ or use Google. (please indicate which website you retrieved Beta from) 1. a. b. c. PVH Corp (PVH) Tiffany (TIF) Guess? (GES) 2. Use the CAPM to compute the reasonable return for each of these stocks. Use risk free rate of return and the market rate of return given in #1, above. d. Coca Cola (KO) e. Walmart (WMT) f McDonald's (MCD) 3. Why do the returns you computed above represent a reasonable (or fair) return for each stock? The required return for each stock? a. b. What do you notice about the pattern or trend of returns for the fashion companies (in #1) as compare to those of the non-fashion companies (in #2)? Why does that occur? Does that make sense in terms of the line of business of the companies in the respective groups? 4.Explanation / Answer
Statement showing return as per CAPM method
CAPM method shows the required return for each stock
Beta of fashion companies are highly diversified and beta of non fashion companies are less diversified. it means in fashion sector one has to see company wise performance rather than industry as a whole.
Stock Beta Risk premium(5.5%-0.5%) Beta*risk premium Risk free rate CAPM = Risk free rate+Beta(risk premium) PVH corp 0.51 5% 2.55% 0.5% 3.05% Tiffany 1.77 5% 8.85% 0.5% 9.35% Guess -0.1 5% -0.50% 0.5% 0.00% Coca Cola 0.58 5% 2.90% 0.5% 3.40% Walmart 0.11 5% 0.55% 0.5% 1.05% McDonald's 0.82 5% 4.10% 0.5% 4.60%Related Questions
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