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Essay

3 Risk and Capital

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Issue:

Business

 

Written by:

Lulu G

 

Date added:

August 26, 2015

 

Level:

University

 

Grade:

A

 

No of pages / words:

4 / 1047

 

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8568 times

 

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Essay content:

The CAPM formula and the interpretation of its components are as follows: kp = kRF + (kM ? kRF) x a In this formula, the capital asset pricing model, we calculate the required rate of return on an investment project given its degree of risk as measured by beta. So the meanings of each component of this formula are as follows: kp = the measured rate of return suitable for the investment project kRF = the risk-free rate of return kM = the required rate of return on the overall market a = the project's beta So by inserting our quantities that we have already found we can find the answer to our CAPM formula for this problem...
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We must as remember to use the 5.00 as our risk-free rate of return, which was the answer we found for question 1. We must also use the assumed market risk premium of 7.5%, which was provided in the text of this assignment. Since our Km-Krf is equal to the market risk premium, we can therefore find our value using the premium rate we were already given...
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