You are going to hold a stock for one year. Over the year, you expect the overall market to return 12%, and you expect the yield on the 3-month treasury bill to be 2%. Use the CAPM equation to answer the following questions.
a. The beta of United Parcel Service (UPS) is about 0.8. What must you require regarding the return on United Parcel Service in order to justify the risk of owning it over the next year? Give a numerical answer and show work.
b. The beta of Apple (AAPL) is about 1.5. What must you require regarding the return on Apple in order to justify the risk of owning it over the next year? Give a numerical answer and show work.
c. Suppose that you expect to earn an internal rate of return of 15% on AAPL stock. According to the guidelines in the text, would this be an acceptable investment? Explain.