Capital Asset Pricing Model and Return

It is stated by Sanchez (2002) that financial returns should be in line with what the investor can get in the market

* Stock Beta: Exhibit 5 shows a detailed measurement of the company’s stock returns in relation to the rest of the market through 5-year historical price and index data. The analysis includes monthly returns of both the NYSE and the S&P 500 index in order to capture a comprehensive view of the market return. In each comparison, the monthly returns of the Target stock and market are plotted on Y-axis and X-axis respectively to get the regression line’s slope or beta. The analysis arrives at an average beta of 0.988 which indicates a similar movement of Target stock’s returns in comparison to the whole market over time.

1. True or False: According to the CAPM, a stock's expected return is positively related to its beta.

expected returns, yet the investment on MORELY appears the cost, which has only 5.70% expected returns.

Why is it important to consider effective rates of return? a)  Investments with different compounding intervals provide different effective returns.

3. The discount rate that causes the net present value of a project to equal

If D0  $2.00, g (which is constant)  6%, and P0  $40, what is the stock's expected total return for the coming year?

The other expected return cannot be determined unless one is looking at other markets and how much return one can achieve in those markets. I liken this to someone owning a home. It is very typical for a homeowner to want to buy a house when the market is low and then make a profit. Most individuals do take out mortgages in order to carry out such a large investment. During the

The beta coefficient is a measure of a stock’s market risk, or the extent to which the returns on a given stock move with the stock market.

      Beta: is seen as an ‘index of responsiveness’ of changes in a security’s returns relative to changes in returns on the market, in this case is sport utility industry)

The beta coefficient is based purely on historical data which tells us how a stock

Finance 316 practice problems for final exam 1. True or False: According to the CAPM, a stock 's expected return is positively related to its beta. >> True 2. In practice, the market portfolio is often represented by: A. a portfolio of U.S. Treasury securities. B. a diversified stock market index. C. an investor 's mutual fund portfolio. D. the historic record of stock market returns. 3. A stock 's beta measures the: A. average return on the stock. B. variability in the stock 's returns compared to that of the market portfolio. C. difference between the return on the stock and return on the market portfolio. D. market risk premium on the stock. 4. If the slope of the line measuring a stock 's historic returns against the market 's historic

b. Because it focuses on the earning returns in excess of the cost of the capital, that is the most reasonable way to evaluate the return.

So instead, we will look at comparable firms. Firms in the same industry pursuing the same types of projects will have the same sorts of risks, thus their asset betas will be approximately the same. The returns we calculate for these firms, based on stock price movement, dividends, and stock splits, are their equity betas.

Accordingly, the expected selling price is dependent on the expected interest rate, that is p_e^B=A⁄i_e . Consequently, the expected capital gain or loss, G, is potentially