Capital Asset Pricing Model

Question

Levine Manufacturing, Inc. is considering several investments.

The rate on Treasury bills is currently 2.75%, and the expected

return for the market is 12 percent. What should be the

required rates of return for each investment using the CAPM?

Security  Beta

A                1.50

B                0.90

C                0.70

D                1.15

Please show how to calculate with BA II Plus calculator.

Answer 1

CAPM is:

Required rate of return = risk free rate + beta (expected market return - risk free rate), so it is plug and chug:

Security A: RROR = 2.75% + 1.50 (12% - 2.75%) equals 16.63%

Security B: RROR = 2.75% + .90 (12% - 2.75%) equals 11.08%

Security C: RROR = 2.75% + .70 (12% - 2.75%) equals 9.23%

Security D: RROR = 2.75% + 1.15 (12% - 2.75%) equals 13.39%