Question

You are analyzing two assets: collectible LEGO sets, and stock of Apple. In the last 5 years, LEGOs have had an annual volatility of 5%, annual return of 6%, and a CAPM beta (the correlation coefficient between the asset and the market risk-premium) of 1.6. Apple has had an annual volatility of 10%, an annual return of 8%, and a CAPM beta of 1.2. Is the following statement true or false?

According to CAPM, Apple has a higher expected return than LEGO.

Answer 1

Answer:

No, Apple has lower rate of return than LEGOs.

Explanation:

Risk free rate is 2% and Market risk is 9%

Expected return can be calculated by :

E(r) = Rf + beta * (Rm - Rf)

E(r) LEGOs = 2 + 1.6 * (9 - 2)

E(r) LEGOs = 13.2%

E(r) Apple = 2 + 1.2 * (9 - 2)

E(r) Apple = 10.4%