Probability rM rJ
0.2 12% 16%
0.3 8 7
0.5 20 13
Calculate the expected rates of return for the market and Stock J.
Stock Investment Beta
A $700,000 1.70
B 1,400,000 -0.70
C 1,300,000 1.15
D 2,100,000 0.85
If the market’s required rate of return is 12% and the risk-free rate is 3%, what is the fund’s required rate of return?
(i.e. D1 = $2.28). The dividend is expected to grow at a constant rate of 10% a year. The required rate of return on the stock, r is 17%. What is the estimated value per share of Boehm’s stock?
(1): Here we will have to use CAPM i.e. capital asset pricing model.
As per CAPM required rate of return = risk free rate + beta*(expected return on market – risk free rate)
= 4.5% + 8*(13.6% - 4.5%)
= 77.30%
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