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Required rate of return using CAPM
So Ive done the entire question, but Im wondering if I should have more for part b on my explanation? Also- would you agree that my values in part A are correct?
a.Compute a fair rate of return for Intel common stock, which has a 1.2 beta. The risk-free rate is 6 percent, and the market portfolio (New York Stock Exchange stocks) has an expected return of 16 percent. r_a=r_f+β_a (r_m-r_a) ra=.06+1.2(.16-.06) ra=.06+1.2(.10) ra=.06+.12 ra=.18 or 18% b.Why is the rate you computed a fair rate? This would definitely be considered a fair rate because the expected rate of return is only 16% and the calculated rate of return is 18%, which exceeds all expectations. |
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