ACCA AFM · Guided practice (Show me how)
Chapter 8: The Capital Asset Pricing Model
CAPM - required returns, a portfolio beta and alpha
The capital asset pricing model: E(ri) = Rf + beta i (E(rm) - Rf).
(a) Q plc has a beta of 1.5. The market is giving a return of 12% and the risk-free rate is 5%. What will be the required return from Q plc?
(b) Daniel decides to invest his money as follows: 20% in A plc, which has a beta of 1.2; 40% in B plc, which has a beta of 1.8; 30% in C plc, which has the same risk as the market; 10% in government securities. The market return is 20% and the risk-free rate is 8%. (i) What will be the overall beta of his investments? (ii) What overall return will he be receiving?
(c) D plc has a beta of 0.6 and is giving a return of 8%. The market return is 10% and the risk-free rate is 4%. What is the alpha value of D plc?
(a) Q plc: required return
Calculate the market risk premium and Q plc's required return.
(b) A portfolio's beta and return
Calculate Daniel's portfolio beta and required return.
(c) Alpha
Calculate D plc's theoretical return and alpha, and explain the significance of its alpha.
Opening this exercise…