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Homework answers / question archive / Capital Asset Pricing Model (CAPM) is one of the finance techniques that are used frequently to compute expected return from financial investments
Capital Asset Pricing Model (CAPM) is one of the finance techniques that are used frequently to compute expected return from financial investments.
Using the following information below, calculate Expected Return of Abdullah.
Abdullah has an investment in RAK Ceramics Industries.
Beta of this investment is 0.80.
Return of Abu Dhabi Stock Exchange (ADX) is 25%.
Return of the Abu Dhabi Government bonds 10%.
a) What is the return of this investment? 2 marks
b) In your own words, define beta of your investment. 1 marks
c) What is the value of beta of the whole market? 1 marks
d) Where can you find the value of beta of the whole market? 1 marks
Answer:
a) Return of this investment = 22%
b) Means a 1% change in market bring about .80 change in the expected rate of interest.
c) Value of beta of market is '1'
d)
Solution:
a) Given:
Risk-free rate of return = 10%
Return in market = 25%
= 0.80
Expected rate of return = risk-free rate of return + (return from market - risk-free rate of return
= 10% + 0.80(25%-10%)
= 22%
return of this investment = 22%
b) Value of beta in our case is 0.80, this means that with a 1% change in market return changes the expected rate of return by 0.80.
c) The value of beta of market is '1'.
d) the value of market beta is a standard of '1' as the change in a value in respect to itself is equal to '1'.
