Problem 4: CAPM intuition check (4 points) (a) If stock A has a higher standard
ID: 2816233 • Letter: P
Question
Problem 4: CAPM intuition check (4 points) (a) If stock A has a higher standard deviation of returns than stock B, which should have a higher expected return according to the CAPM . Stock A e Stock B Need further information (b) According to the CAPM, if you know the market risk premium, what is the only variable you need to know to determine the risk premium for asset A? Only variable you need to know: (1 point) (c) Over the past 10 years, Apple stock and the market have had the following average annual excess returns and standard deviations. Asset Apple Market Average excess return Standard deviation of returns 30 18% Does this violate the CAPM: Explain (d) For the next year, everyone agrees Apple stock and the market have the following ex pected excess return and standard deviation of returns. Asset Apple Market Expected excess return 44% Standard deviation of return 30% 18% Does this violate the CAPM Explain.Explanation / Answer
a)As per capm model the stock with higher deviation will have higher return
it is stock A
b)beta of the asset
c)No it did not violate the capm as the std of apple stock is higher than the market the expected return is also higher
Rm-Rf=6%
d)No it did not violate and the reason is same as above