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Company Company A Company B Forecasted return 7% 11% Standard deviation of returns 8% 23% Beta 1 3 The market risk premium is 6% and the risk-free rate is 3%. Using Capital Asset Pricing Model (CAPM), will you invest in the companies

Respuesta :

Answer and Explanation:

The computation is shown below:

As we know that

Required rate of return = Risk Free Rate +  Beta × (Market Return -Risk Free Rate)

For company A

= 3% + 1 × 6%

= 9%

For Company B

= 3% + 3  ×  6%

= 21%

As we can see that the forecast return should be lower than the required return so we should not invest in company A also the same is done in company B too

Therefore we dont invest in any of the company

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