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At the beginning of 2014, Apple's beta was 1
At the beginning of 2014, Apple's beta was 1.2 and the risk-free rate was about 3.8%. Apple's price was $82.22. Apple's price at the end of 2014 was $195.77. If you estimate the market risk premium to have been 6.1%, did Apple's managers exceed their investors' required return as given by the CAPM? The expected return was 0%. (Round to two decimal places.)
Expert Solution
Given that the beta of the stock is 1.2
Risk free rate is 3.8%
Risk premium = 6.1%
As per CAPM the required rate of return is
Re = Rf + Beta( Rm - Rf)
Where Re is the required rate of return
Rf is the risk free rate
Rm - Rf is the ,market risk premium
Hence Re as per CAPM is
Re = 3.8 + 1.2*6.1%
Re = 3.8 + 7.32
Re = 11.12%
Given that the apple stock value at the beginning of the year is 82.22
Apples stock price at the end of the year is 195.77
Holding period return on the stock is (195.77 - 82.22)/82.22
= 113.55/82.22
= 138.1051%
Apples stock has raised more than 100% during the year
Hence we can say the expected return on the stock exceeded the return as per CAPM
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