Question

Q1. A share has a beta of 1.2. The risk-free rate of return is 2.0% and the expected return on the market is 8.9%. What is the expected return from the share according to the CAPM?

Q2. A share has a beta of 1.7. The risk-free rate of return is 3.1% and the expected return on the market is 9.0%. What is the expected return from the share according to the CAPM?

Q3. Assume that beta is always positive. On a given day the excess return on the Australian stock market is +1.9%. On the same day, the excess return on Share ABC is -1.4%. What would you conclude from this information?

Q4. A share has a beta of 1.7. The risk-free rate of return is 2.8% and the expected return on the market is 11.2%. What is the market risk premium?

Q5. A share has a beta of 1.5. The risk-free rate of return is 3.5% and the market risk premium is 9.4%. What is the expected return from the share according to the CAPM?

Answer 1

Solution 1
	Required return=	Risk free rate + Beta * (Market return - risk free rate)
	Required return=	2%+1.2*(8.90%-2%)
	Required return=	10.28%
Solution 2
	Required return=	Risk free rate + Beta * (Market return - risk free rate)
	Required return=	3.1%+1.7*(9%-3.1%)
	Required return=	13.13%
Solution 3
	Since BETA is positive and market return is positive, and share return is negative
	it represents that the risk free rates have turned negative more than the market return and hence market premium has also turned negative.
Solution 4
	Market premium	(Market return - risk free rate)
	Market premium	(11.2%-2.8%)
	Market premium	8.40%
Solution 5
	Required return=	Risk free rate + Beta * (Market risk premium
	Required return=	3.5%+1.5*9.4%
	Required return=	17.60%