Reference no: EM13381329

Calculate the firm's expected rate of return using the capital asset pricing model. You will first need to calculate your company's beta and then use that in the CAPM formula to get the expected rate of return.

1. Calculate each of the monthly returns for your stock over the 5 years of data that you have collected (i.e., percentage change in price each month). If your prices have not been adjusted for splits, you will need to adjust the calculations for those months in which a split occurred. (A 2-for-1 split will double the number of shares but not change the value of the company, so each share will be worth half as much. If P₀ is the price at the end of the month before the split and P₁ is the price at the end of the month in which the split occurred, then you will need to multiply P₁ by 2 before you do your return calculation, since two shares at P₁are equivalent to one share at P₀.) If you are using the adjusted closing prices from the Yahoo site, these adjustments have been made for you.
2. Calculate each of the monthly returns for the S&P/TSX Composite Index over the 5 years of data that you have collected. No adjustments will need to be made in these prices.
3. Create a scatter plot using Excel that shows the return on your company's stock and the return on the market index in the same month (see Figure 11.2 in your text). Plot the characteristic line on the graph (the trendline).
4. Calculate beta as the slope of the characteristic line on your graph (see a sample spreadsheet on page 340 of your text).
5. Using the value of beta that you calculated, the return on a three-month treasury bill for the risk-free rate, and 7 percent as the market risk premium (the average market risk premium over the last 82 years), calculate the expected rate of return based on the capital asset pricing model.