Page 342 - FM Integrated WorkBook STUDENT 2018-19
P. 342
Chapter 17
Question 19
The CAPM
The current average market return being paid on risky investments is 15%,
compared wtih 7% on government gilts. X Co has a beta figure of 0.9.
Calculate the required return of an equity investor in X Co.
E(r i) = R f + β i[E(r m) – R f ]
E(r i) = 7 + 0.9 × (15 – 7)
E(r i) = 14.2%
Question 20
The CAPM
Z Co is currently paying a return of 13% to its equity shareholders. The return
on treasury bills is 5% and the average market premium for risky investments is
7%.
Calculate the beta of Z Co and what does this tell us about the volatility of Z
Co’s returns compared to the market average.
Average market premium of 7% = (E(r m) – R f) or in other words E(r m) = 7% +
5% = 12%
E(r i) = R f + β i[E(r m) – R f ]
13 = 5 + β × 7
13 – 5 = 7β
β = 8/7 = 1.14
As the β is >1 the returns are more volatile (more risky) than average.
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