Question

Go to any financial information website such as Yahoo Finance and find the beta coefficient of any stock you choose. Complete the following tasks.

Name the stock.

Using the beta and the capital asset pricing model formula calculate the expected return if the current risk-free rate is 2% and the market’s is expected return is 5%.

Your stock has recently returned 6% and you expect this rate of return to continue into the future.

Is this an acceptable rate of return based on the risk?

Show your CAPM calculation and explain the result.

Answer 1

Let us suppose, we choose of ITC Limited (An Indian Company) Beta of Company is =0.66

Return as per CAPM= Rf+b(Rm-Rf)

Return= 2%+0.66(5%-2%)

Return(R)=3.98%

Current return is 6% & the same has been expected in future.This is acceptable rate of return based on risk. As expected rate of return as per CAPM is 3.98% but our stock is currently earning 6%. & beta of stock is less than 1 & actual rate of return is more than expected. This implies ITC limited is performing well.