Question

Below are returns on the stock A and S&P500 index. All numbers are in decimals (-0.0222 is equivalent to -2.22%).

A	S_P500
-0.0222	0.0032
-0.0048	-0.0058
0.1333	0.0434
0.0765	0.1081
-0.0161	-0.0121
0.1250	0.1400
0.0145	0.0368
-0.0475	-0.0454
0.0430	0.0577
-0.0260	-0.1374
0.0071	0.0064
0.0249	0.0186
0.0850	0.0215
-0.0624	-0.0752
0.0933	0.0365
0.0456	0.0528
-0.0632	-0.0131
0.0450	0.0009
0.0200	0.0017
0.0280	0.0985

Suppose that the next S&P500 return will be 7%. Use the CAPM model to calculate the expected return on the stock A. Assume the risk-free rate of 1%.

Please write an answer in decimals. For example, 12.34% would be 0.1234.
Also, round your answer to the fourth decimal.

Answer 1

Expected return on Stock A using CAPM model = Risk free rate + Beta * Market risk premium

Risk free rate = 1%

Market risk premium = 7% - 1% = 6%

Beta = 0.6577

Expected return on stock A = 1% + 0.6577*(6%) = 4.9462 % = 0.0494

Formulae