Intermediate Financial Management
14th Edition
ISBN: 9780357516782
Author: Brigham, Eugene F., Daves, Phillip R.
Publisher: Cengage Learning
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When working with the CAPM, which of the following factors can be determined with the most precision?
a. The beta coefficient of "the market," which is the same as the beta of an average stock.
b. The beta coefficient, bi, of a relatively safe stock.
c. The market risk premium (RPM).
d. The most appropriate risk-free rate, rRF.
e. The expected rate of return on the market, rM.
a. Determine Stock X's beta coefficient.
b. Determine the arithmetic average rates of return for Stock X and the NYSE over the period given.
Calculate the standard deviations of returns for both Stock X and the NYSE.
c. Assume that the required return on equity, re, for Stock X is equal to its average return. Likewise,
assume that the market return is equal to the NYSE's average return. Using the information calculated,
what is the assumed risk-free rate in the CAPM equation?
Hint: Solve algebraically for rf in, re = r¡ + B(rm – r;)
Characteristic Line and Security Market Line
You are given the following set of data:
Historical Rates of Return
Year
NYSE
Stock X
1
-26.5%
-11.0%
2
37.2
25.0
3
23.8
13.5
4
-7.2
2.0
5
6.6
11.1
20.5
18.5
7
30.6
19.0
a. Use a spreadsheet (or a calculator with a linear regression function) to determine Stock X's beta coefficient. Do
not round intermediate calculations. Round your answer to two decimal places.
b. Determine the arithmetic average rates of return for Stock X and the NYSE over the period given. Calculate the
standard deviations of returns for both Stock X and the NYSE. Do not round intermediate calculations. Round
your answers to two decimal places.
Stock X
NYSE
Average return, FAvg
%
%
Standard deviation, ơ
%
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