Estimated value of beta to estimate stocks expected rate

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Let R be the expected return on a risky investment and R_f be the return on a risk-free investment. The fundamental idea of modem finance is that an investor needs a financial incentive to take a risk. Hence, R must exceed R_f. According to the capital asset pricing model (CAPM) the expected excess return on an asset is proportional to the expected excess return on a portfolio of all available assets (the "market portfolio") That is, the CAPM says that R-R_f= beta (R_m - R_f) + u where R_m is the expected return on the market portfolio and p is the coefficient in the population regression of R - R_f on R_m-R_f. Suppose that the value of p is greater than 1 for a particular stock. Show that the variance of (R -R_f) for this stock is greater than the variance of (R_m -R_f). Suppose the value of p is less than 1 for a particular stock. Is it possible that variance of (R -R_f) for this stock is greater than the variance of (R_m -R_f)? In a given year, the rate of return on 3-month Treasury bills is 2.2% and the rate of return on a large diversified portfolio of stocks (the S&P 500) is 6.1%. For each company listed below, use the estimated value of beta to estimate the stock's expected rate of return.

Reference no: EM13889194

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