Question

If Market Beta is 1.5 & VEDANTA Share Standard Deviation is 5.4%. If Market (NIFTY) Returns expected in FY 2019-20 are 15%. Investor is in dilemma to Invest in BANK OR VEDANTA Security (Share). Compared to just Keeping Money in SBI / Good Savings Account @ 4% and FD at 6.5% . What can be the Expected RETURNS of VEDANTA Share in FY 2019-20 w.r.t. Capital Asset Pricing Model?

Answer 1

Capital Asset Pricing Model (CAPM) explains the relationship between the systematic risk and the expected return of stocks. It helps the investors to take accurate investment decisions. The model's equation is as follows:

where,

E(R)= Expected Return

=Risk free return

= Market Risk

= Market Return

The provided information in the question is as follows:

Expected Return of Vedanata Share= ? (to find out), E(R)= ?

Market risk (Beta) = 1.5

Market Return = 15%

Risk free rate = 6.5%

= 6.5+1.5(15-6.5)

=6.5+1.5*8.5

=6.5+12.75

=19.25%

Expected Return of Vedanata Share=19.25%