Capital Asset Pricing Model the Research Proposal

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Investopedia, a noteworthy financial website designed by Forbes Media and aiming to sustain investing decisions, defines the cost of equity as "the return that stockholders require for a company […]. A firm's cost of equity represents the compensation that the market demands in exchange for owning the asset and bearing the risk of ownership."

The CAPM equitation:

ra = rf + ?a x (rm - rf) (Investopedia)

In our scenario, the risk free rate is of 4.5, the risk of the security is of 0.5542 and the expected market return on the Coca Cola share is of 11. Given this situation, the cost of equity (ra) can be computed as follows: 4.5 + 0.5442 x 6.

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5 = 8.0373

3. Portfolio Beta

Knowing the risks associated with each investment in the portfolio, the beta of the portfolio can be computed by summing up the multiplications of each individual beta times the percentage of the respective stock in the portfolio (Farlerx, 2009).

Beta for the Coca Cola Company (KO) = 0.5542

Beta for the Emerson Radio Corp (MSN) = 1.5645

Beta for the Wal-Mart Stores Inc. (WMT) = 0.2203 (PC Quote, 2009)

Beta for the entire portfolio = 0.33 x 0.5542 + 0.33 x 1.5645 + 0.33 x 0.2203 = 0.7718

With this new beta, the prospective investor can calculate the expected rate of return on this.....

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