One of the tools finance professionals use to determine the rate of return an investment should provide given its level of risk is the Capital Assets Pricing Model or CAPM. For this assignment, you will create your own CAPM and apply it to find various returns on investments.
Prompt Part 1 Please look up the risk-free return on US Treasury Bills on December 31st, 2019 and the return on the S&P 500 for 2019. Using this information, construct a CAPM graph using MS Excel or another tool of your choice.
You’ll need to refer to the CAPM formula from this course for your calculations, but you can use this page to help with constructing your graph. Once your graph is complete, please copy it or take a screenshot of it and paste it into a Word doc that you can submit for this assignment.
Part 2 Below your CAPM graph on your Word doc, please answer the following questions:
1. Using the CAPM formula, calculate the required rates of return for betas of 0.50, 1.0, 1.25 and 3.0. Show the formula filled in with the numbers you looked up. If the market return was 15% what would the required rate of return be on a stock with a beta of 0.75?
2. What kind of stocks would have betas of 0.5, 1.0, and 3.0? Please describe these stocks in terms of risk in a few sentences and provide an example stock for each. Formatting & Sources Please write your paper in APA format.
You may refer to the course material for supporting evidence, but you must also use 2 credible, external sources to support the data in your CAPM graph and your answers to the questions in part 2. Please cite your sources using APA format.
If you use any Study.com lessons as sources, please also cite them in APA (including the lesson title and instructor’s name). If you’re having trouble finding sources from peer-reviewed scholarly journals, try resources such as the Harvard Business Review, Investopedia, or Marketwatch.
Secondary sources may also come from reputable websites with .gov, .edu, or .org in the domain. (Wikipedia is not a reputable source, though the sources listed in Wikipedia articles may be acceptable.)
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