Capital Asset Pricing Model

6.10

Suppose you invest $27,000 in King Company Stock, which has a beta of 1.33 and in 1000 shares of Ace company stock at $23 a share. Ace has long term growth of 4% annually. The riskless rate is 9% and the expected return rate on the market is 17%. Next year the dividend of Ace will be $2.30 a share. Find the beta of Ace and the expected return of the portfolio.

*I am confused on how to achieve the answer. The answer is provided but I am confused on the steps to get it.

Answer= B=.625, E(Rp)=17.05

6.12

Knoll Inc stock has a beta of 1.25, the expected return on the market is 12%, and the riskless rate is 8%. Knoll Inc may grow annually at the rate of 3% for many, many years. Next year Knoll will pay a dividend of $3.00. Find the price of Knoll Stock.

*I am confused on how to achieve the answer. The answer is provided but I am confused on the steps to get it.

Answer=$30.00

6.14

Cornfeld Company stock has a beta of 1.1 and its expected return is 12%, whereas Goldenstein Company stock has beta of 1.2 and its expected retun rate is 12.3%. Find the riskless rate and the expected return rate of the market.

*I am confused on how to achieve the answer. The answer is provided but I am confused on the steps to get it.

R=8.7%, E(Rm)=11.7%

6.16

The expected return on the market next year is 15%, whereas the riskless rate is 6%. The beta of IBM is 0.8, its current price is $120 per share and its dividend next year is $6. Using CAPM, find the expected price of IBM stock next year.

*I am confused on how to achieve the answer. The answer is provided but I am confused on the steps to get it.

Answer= $129.84

The problem deals with fundamental issues in Finance including holding period returns, return under CAPM, risk-free rate etc.