Sample CAPM Problems
Estimate the beta value for a security which has a covariance with the market portfolio of 0.40 when the market portfolio has a variance of 0.50
Recall
(1)\begin{align} \beta=\frac{cov(R_i,R_m)}{\sigma (R_m)} \end{align}
Thus
(2)\begin{align} \beta=\frac{0.40}{0.50}=0.8 \end{align}
What return does the capital asset pricing model predict for an individual security, i, that has a beta value of 0.7 if the expected risk-free rate of return is 5% and the expected market rate of return is 15%?
Recall
(3)\begin{align} R_i=R_f+\beta\times(R_m-R_f) \end{align}
Thus
(4)\begin{align} R_i=5+0.7\times(15-5)=12\% \end{align}
page revision: 1, last edited: 09 Feb 2009 19:44