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}