Question

Here are data on two companies. The T-bill rate is 4.8% and the market risk premium is 5.9%. Company $1 Discount Store Everything $5 Forecast return 12 % 11 % Standard deviation of returns 12 % 14 % Beta 1.6 1.0 What would be the fair return for each company, according to the capital asset pricing model (CAPM)? (Round your answers to 2 decimal place

Answer 1

Answer and Explanation:

The computation of the fair return for each company is shown below:

Fair Return = Risk free rate of return + Beta × market risk premium

= 4.8 + 1.6 × 5.9

= 14.24%

Now

Everything $5 is

= 4.8 + 1 × 5.9

= 10.7%

Hence, the same should be considered