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Assume that the 90-day Treasury Bill rate of return is 3.5% andthe S&P 500 index...

Assume that the 90-day Treasury Bill rate of return is 3.5% and the S&P 500 index rate of return is 12%. a) Write the CAPM equation using the above data. b) What is the intercept and slope of the above CAPM equation? c) What is the stock’s risk premium from the above data

Solutions

Expert Solution

The security market line gives the formula of Capital Asset pricing model:

As per CAPM model:

Re= Rf+(Rm-Rf)B

Re= required rate of return.

Rf= Risk-free rate.

Rm = return on the market.

Rm-Rf =Market Risk Premium.

B = Beta, systematic risk.

a. Re = 3.5% + 8.5%*B

Re is represented by the y-axis.

Rm, Rf lies in the Y-axis.

B is represented by the y-axis.

The Equations of CAPM becomes more clear, taking the relationship between different components.

It shows the relationship how the Market return of Individual securities (Re) in relation to its security class risk (B).

b. Intercept = Rf = 3.5%

Slope = Rm-Rf = 8.5%

c. Stocks risk premium = 8.5%*Beta

jeff jeffy answered 2 years ago
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